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Optimal and time consistent exchange-rate management in an overlapping-generations economy

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  • Eaton, Jonathan

Abstract

This paper analyzes exchange rate management in a simple overlapping generations model. This framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy.The analysis identifies two objectives of monetary policy,providing adesirable store of value and collecting seigniorage. When the chief concern is to provide a desirable store of value (as when the monetary authority's major constituency consists of the asset holders of the economy), a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate. When seigniorage concerns are paramount (as when the authority's constituency is the young generation) flexible rates do better.When seigniorage concernsare paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value, a national currency may not be viable in the absence of exchange controls. Such controls may be justified in this situation.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of International Money and Finance.

Volume (Year): 4 (1985)
Issue (Month): 1 (March)
Pages: 83-100

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Handle: RePEc:eee:jimfin:v:4:y:1985:i:1:p:83-100

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Web page: http://www.elsevier.com/locate/inca/30443

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References

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  1. Alan C. Stockman, 1978. "A Theory of Exchange Rate Determination," UCLA Economics Working Papers 113, UCLA Department of Economics.
  2. Elhanan Helpman & Assaf Razin, 1979. "Towards a Consistent Comparison of Alternative Exchange Rate Systems," Canadian Journal of Economics, Canadian Economics Association, vol. 12(3), pages 394-409, August.
  3. David A. Hsieh, 1982. "International Risk Sharing and the Choice of Exchange-Rate Regime," NBER Working Papers 0842, National Bureau of Economic Research, Inc.
  4. Kydland, Finn, 1977. "Equilibrium solutions in dynamic dominant-player models," Journal of Economic Theory, Elsevier, vol. 15(2), pages 307-324, August.
  5. Aizenman, Joshua, 1981. "The use of the balance of payments as a shock absorber in fixed rate and managed float systems," Journal of International Economics, Elsevier, vol. 11(4), pages 479-486, November.
  6. Jonathan Eaton & Stephen J. Turnovsky, 1983. "The Forward Exchange Market, Speculation, and Exchange Market Intervention," NBER Working Papers 1138, National Bureau of Economic Research, Inc.
  7. Kareken, John & Wallace, Neil, 1981. "On the Indeterminacy of Equilibrium Exchange Rates," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 96(2), pages 207-22, May.
  8. Calvo, Guillermo A, 1978. "On the Time Consistency of Optimal Policy in a Monetary Economy," Econometrica, Econometric Society, Econometric Society, vol. 46(6), pages 1411-28, November.
  9. Buiter, Willem H & Eaton, Jonathan, 1980. "Policy Decentralisation and Exchange Rate Management in Interdependent Economies," The Warwick Economics Research Paper Series (TWERPS) 172, University of Warwick, Department of Economics.
  10. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 66, pages 467.
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Cited by:
  1. Michael Devereux & Charles Engel, 2000. "The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 0022, Department of Economics at the University of Washington.
  2. Charles Engel, 2000. "Optimal Exchange Rate Policy: The Influence of Price Setting and Asset Markets," NBER Working Papers 7889, National Bureau of Economic Research, Inc.
  3. Zhang, Zhichao, 2001. "Choosing an exchange rate regime during economic transition: The case of China," China Economic Review, Elsevier, vol. 12(2-3), pages 203-226.
  4. BEN ALI Mohamed Sami, 2006. "Capital Account Liberalization And Exchange Rate Regime Choice, What Scope For Flexibility In Tunisia?," William Davidson Institute Working Papers Series wp815, William Davidson Institute at the University of Michigan.
  5. Michael B. Devereux & Charles Engel, 1998. "Fixed vs. Floating Exchange Rates: How Price Setting Affects the Optimal Choice of Exchange-Rate Regime," NBER Working Papers 6867, National Bureau of Economic Research, Inc.
  6. Klundert, T.C.M.J. van de & Ploeg, F. van der, 1987. "Wage rigidity and capital mobility in an optimizing model of a small open economy," Research Memorandum, Tilburg University, Faculty of Economics and Business Administration 277, Tilburg University, Faculty of Economics and Business Administration.
  7. Robert P. Flood & Robert J. Hodrick, 1985. "Real Aspects of Exchange Rate Regime Choice with Collapsing Fixed Rates," NBER Working Papers 1603, National Bureau of Economic Research, Inc.

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