School of Economics and Finance

No. 684: Exchange Rate Policy in Small Rich Economies

Francis Breedon, , Queen Mary, University of London
Thórarinn G. Pétursson , Central Bank of Iceland
Andrew K. Rose , Haas School of Business

December 1, 2011

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We look at the exchange rate policy choices and outcomes for small rich economies. Small rich economies face significant policy challenges due to proportionately greater economic volatility than larger economies. These economies usually choose some form of fixed exchange rate regime, particularly in the very small economies where the per capita cost of independent monetary policy is relatively high. When such countries do choose a free or managed floating regime, they appear to derive no benefit from those regimes; their exchange rate volatility seems to rise without any significant change in fundamental economic volatility. Thus, for these countries, floating exchange rates seem to create problems for policy makers without solving

J.E.L classification codes: F33, E52

Keywords:Small economies, Exchange rate regimes