Date of Award

1984

Document Type

Dissertation

Degree Name

Doctor of Philosophy (PhD)

Abstract

This study theoretically and empirically investigated the movements in the effective exchange rate indices (ERIs) of six less developed countries (LDCs) during the period of generalized floating of major currencies. Given the objective of stabilizing the ERI, four exchange rate arrangements were considered. First, a policy of continuing to fix the value of the domestic currency to the U.S. dollar. Second, a policy of stabilizing the LDC's ERI by changing the value of the domestic currency vis-a-vis the dollar. Third, pegging the domestic currency to the Special Drawing Right (SDR) basket of currencies. Fourth, stabilizing the ERI under an SDR peg. Each of these arrangements requires the use of foreign exchange reserves in order to manage the value of the domestic currency with respect to the dollar. The extent of dollar reserves depends on the difference between the exchange value of the currency under each arrangement and the market exchange rate that would prevail if the LDC allowed its currency to fluctuate freely. The assumption is that the larger the difference between the two rates, the larger the amount of reserve required. The results of the study indicated that all six countries experienced movements in their ERIs, during the period of generalized floating. These movements could have been reduced had these LDCs pegged their currencies to the SDR. This confirmed the hypothesis that countries with a diversified trade pattern can reduce the instability in their ERI by switching from a single currency peg to a basket peg. In terms of the use of reserves, the results indicated no significant difference between the exchange rates that would emerge under the four exchange rate arrangements and the exchange rate that would result under a policy independent floating. This implied that no particular arrangement could be selected as the one requiring the least amount of reserves.

Pages

90

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