Optimal Exchange Rate Regimes: Sunspots, Currency Crises, and Welfare
AbstractIn this two country OLG model there is a potential role for active governments since markets are incomplete. There are many coordinated policies (exchange rate regimes) that result in an optimal allocation if extrinsic uncertainty plays no role. However, if we take into account the possibility of sunspot equilibria, the set of optimal policies is drastically reduced. Whenever there is a possibility of influence by extrinsic uncertainty, one or both governments may seek to avoid this by intervening on the foreign exchange markets. When only one country does so, this may lead to a currency crisis, where the central bank is active and is with positive probability unsuccessful in its attempt to defend its currency. If the two countries form a monetary union, a coordinated fiscal policy is needed as a substitute for an optimal exchange rate regime.
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Bibliographic InfoArticle provided by Vita e Pensiero, Pubblicazioni dell'Universita' Cattolica del Sacro Cuore in its journal Rivista Internazionale di Scienze Sociali.
Volume (Year): 112 (2004)
Issue (Month): 2 ()
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currency crisis; exchange rate policies; monetary union; OLG model; perfect currency;
Find related papers by JEL classification:
- D42 - Microeconomics - - Market Structure and Pricing - - - Monopoly
- D60 - Microeconomics - - Welfare Economics - - - General
- D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
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