EXCHANGE-RATE MISALIGNMENTS AND ADJUSTMENTS - IMPLICATIONS FOR FLOATING AND FIXED PARITY SYSTEMS

We present a microeconomic efficiency cost framework for discriminatin g between fixed and floating exchange rate systems, and illustrate it with UK data over 1975-90. It is found that a fixed parity system woul d have been unambiguously preferred to a floating system over this per iod, unless the parity were set sufficiently non-centrally or costs fr om persistent currency overvaluation were sufficiently high. Under no circumstances could a floating parity have been unambiguously preferre d to a fixed parity system.