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Working Paper

On the Choice of the Exchange-Rate Regimes

This paper utilizes recent research developments in portfolio balance theory and in real exchange-rate instability to synthesize, update, and test the optimum currency area (OCA) theory. Four hypotheses, capturing the central features of the OCA theory, are advanced and tested in a multinomial-logit setup. The empirical results establish the linkage between a fixed rate and financial integration, trade integration, plus inflation convergence. The Mundell-Fleming ranking of regime is refuted in a fundamental way. These findings are applied to a discussion of European monetary integration, in relation to both its final objective and its intermediate procedure.

Working Papers of the Federal Reserve Bank of Cleveland are preliminary materials circulated to stimulate discussion and critical comment on research in progress. They may not have been subject to the formal editorial review accorded official Federal Reserve Bank of Cleveland publications. The views expressed in this paper are those of the authors and do not represent the views of the Federal Reserve Bank of Cleveland or the Federal Reserve System.

Suggested Citation

Wang, Chien Nan. 1990. “On the Choice of the Exchange-Rate Regimes.” Federal Reserve Bank of Cleveland, Working Paper No. 90-02.