| The breakdown of the par-value exchange rate system in 1973 has led to an era of generalized floating exchange rates. We are still in search of a desirable exchange regime for a nation, or for the world as a whole. In this study, we develop an economic rationale for an optimal degree of intervention in the foreign exchange market, and ask whether empirical evidence supports the theory or suggests that the theory should lead to a change in practice.;The first essay considers the choice between fixed and flexible exchange rate regimes from the perspective of a single nation. The Taylor-type staggered wage contract model confirms the desirability of the fixed (flexible) rate for dominant real (monetary) shocks, while it imposes a trade-off between price and output stability for dominant wage shocks. Empirical studies support the view that macroeconomic stability is in general the objective of the monetary authorities.;In the second essay, we consider optimal intervention in the foreign exchange market from the international perspective. In particular, by evaluating the characteristics of both real and monetary shocks of the G-7 countries, we provide empirical background for an optimal feedback rule in an international monetary regime. The empirical results show that the world money stock target and flexible exchange rates are desirable for international monetary policy coordination.;In the third essay, a desirable exchange rate policy for developing countries is analyzed by reviewing the experience of Korea. The switch from the single currency peg to the basket currency peg in 1980 helped the monetary authorities to pursue the stabilization of the real exchange rate. However, the contribution of the exchange rate policy to fast economic growth in the 1980's is limited, and the PPP rule appears inappropriate as a guide for an equilibrium exchange rate. |
