2010) estimate interest rate policy rules for four Latin American emerging markets Brazil, Chile, Colombia, and Mexico--characterized by inflation targeting and floating exchange rates and conclude that Mexico is the only country where changes in nominal exchange rates
were found to be statistically significant in the central bank's reaction function during the inflation targeting period.
What this suggests is that for European countries, the relative stability of bilateral nominal exchange rates
may have been important in allowing for a more fundamental-based evolution of real exchange rates, in contrast to the findings from a wider sample of countries where nominal exchange rate
variation becomes a much more important element.
Given the absence of nominal exchange rates
, relative price adjustment needs to come via relative changes in prices and costs: internal devaluations.
We use Ilzetzki, Reinhart, and Rogoff (2008) de facto classification to identify the behavior of nominal exchange rates
and distinguish between de facto fixed (IRR Fixed), limited flexibility (IRR Lim Flex), and flexible (IRR Flex).
In the 1970s, 1980s and 90s, some Asian countries have experienced some dramatic changes in their nominal exchange rates
due to balance of payments and domestic financial liberalization, the Plaza Accord in 1985, and the Asian crisis in 1997.
As the Nobel laureate economist Robert Mundell and others spelled out in the 1960s, relinquishing nominal exchange rates
emphasizes three alternative mechanisms to cushion regional adjustment: inter-regional fiscal transfers, intra-union migration, and, most importantly, labor markets capable of adapting to shocks.
The large costs of monetary instability mean that adjustment should principally work through more flexible nominal exchange rates
, the report said.
It needs to focus on product-quality, labour up-skilling, and better infrastructure - not on the illusory options of tinkering with nominal exchange rates
and bashing foreigners.
For both sides, it is more desirable to let the adjustment take place through changes in nominal exchange rates
, which would help contain deflation in the north and inflation in the south.
It is well known that, under the current float, real and nominal exchange rates
are highly correlated.
On the other hand, even after utilizing an IT framework, some agents may continue to perceive the exchange rate as a nominal anchor, that is, they may reshape their behaviors conditional upon the movements of the nominal exchange rates
Prior to EMU, nominal exchange rates
among EU countries carried the burden of adjustment, compensating for differences in national price and cost developments.