Please use this identifier to cite or link to this item:
Detken, Carsten
Gaspar, Vítor
Year of Publication: 
Series/Report no.: 
ECB Working Paper 241
The behaviour of the exchange rate under a floating exchange rate regime for a small open economy with perfect capital mobility may appear like a managed float or even a firmer peg. We present a canonical new neo-classical synthesis open economy model where the central bank follows a strategy directed at maintaining price stability. It is shown that the behaviour of the exchange rate depends on the structure of the economy and on the nature of the relevant shocks. In the case of very open economies the exchange rate will look quasi-fixed in response to shocks stemming from the international capital markets. It is also shown that the joined endogeneity of the interest rate and the exchange rate has important implications for the empirical testing of uncovered interest rate parity.
flexible exchange rates
managed floating
price stability
small open economy
uncovered interest rate parity
Document Type: 
Working Paper
Social Media Mentions:

Files in This Item:
349.49 kB

Items in EconStor are protected by copyright, with all rights reserved, unless otherwise indicated.