Monetary policy in the open economy revisited: The case for exchange-rate flexibility restored
AbstractThis paper revisits the sticky-price pricing-to-market model of Devereux and Engel [Devereux, M.B., Engel, C., 2003. Monetary policy in the open economy revisited: price setting and exchange-rate flexibility. Review of Economic Studies 70(4), 765-783], in which fixed exchange rates are optimal even in the face of country-specific nonmonetary shocks. We show that this result hinges critically on the Devereux-Engel model's prediction that international consumption levels are perfectly synchronized under flexible prices. Realistic modifications of the model that produce nonsynchronous consumption movements - such as, the presence of nontraded goods - upset the fixed exchange rate prescription even in the absence of an expenditure-switching role of exchange rate changes.
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Bibliographic InfoArticle provided by Elsevier in its journal Journal of International Money and Finance.
Volume (Year): 27 (2008)
Issue (Month): 6 (October)
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Web page: http://www.elsevier.com/locate/inca/30443
Other versions of this item:
- Obstfeld, Maurice & Duarte, Margarida, 2005. "Monetary Policy in the Open Economy Revisited: The Case for Exchange-Rate Flexibility Restored," 2005 Meeting Papers 386, Society for Economic Dynamics.
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