| This dissertation examines the effects of exchange rate flexibility. The essays fit into the literature on the appropriate exchange rate regime and seek to better understand how exchange rate flexibility affects the domestic economy and thus better inform the debate on optimal currency arrangements.; The first essay investigates the effect of the exchange rate regime on monetary policy autonomy. It classifies countries as pegged or not pegged and examines whether a pegged country must follow the interest rate of the base country. Despite recent research which suggests all countries, not just pegs, lack monetary freedom, the evidence shows that in comparison to non-pegs, pegs follow the changes in base rates more closely and react more quickly to these changes. The results support the idea that by pegging the exchange rate, a country loses monetary freedom.; The second essay examines whether the combination of state regulated bank notes acting as the principal form of money and heterogeneous bank laws in the antebellum US led to a system whereby each state had an independent currency and states were capable of exercising independent monetary policy. It finds that the system can be interpreted as one of loosely fixed exchange rates that allowed independent monetary policy, that states were aware of their ability to affect the bank note circulation, and that some states did in fact try to change their banking systems to do so.; The third essay considers the relationship between exchange rates and prices. Rather than assume exchange rate changes are exogenous shocks that affect prices, the essay uses a long-run restrictions VAR to look at fundamental shocks driving both exchange rates and prices. The relationship of exchange rate and consumer price changes does vary in response to different shocks, which may help explain why consumer price pass-through has varied across countries and time. Import price pass-through seems more consistent across shocks, is typically positive, and nearly complete immediately. This supports the idea that import prices are set in the producer's currency and that the lower CPI pass-through is a result of changes in quantities or margins further down the supply chain. |
