Advanced Search
MyIDEAS: Login to save this book chapter or follow this series

The Optimal Choice of Exchange Rate Regime: Price-Setting Rules and Internationalized Production

In: Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey

Contents:

Author Info

  • Michael B. Devereux
  • Charles Engel

Abstract

We investigate the choice of exchange-rate regime fixed or floating in a dynamic, intertemporal general equilibrium framework. Our framework extends Devereux and Engel (1998) by investigating the implications of internationalized production. We examine the role of price-setting -- whether prices are set in the currency of producers or the currency of consumers in determining the optimality of exchange-rate regimes in an environment of uncertainty created by monetary shocks. We find that when prices are set in producers' currencies, floating exchange rates are preferred when the country is large enough, or not too risk averse. On the other hand, floating exchange rates are always preferred when prices are set in consumers' currencies because floating exchange rates allow domestic consumption to be insulated from foreign monetary shocks. The gains from floating exchange rates are greater when there is internationalized production in this case.

(This abstract was borrowed from another version of this item.)

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.nber.org/chapters/c10582.pdf
Download Restriction: no

Bibliographic Info

as in new window

This chapter was published in:

  • Magnus Blomstrom & Linda S. Goldberg, 2001. "Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey," NBER Books, National Bureau of Economic Research, Inc, number blom01-1, October.
    This item is provided by National Bureau of Economic Research, Inc in its series NBER Chapters with number 10582.

    Handle: RePEc:nbr:nberch:10582

    Contact details of provider:
    Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
    Phone: 617-868-3900
    Email:
    Web page: http://www.nber.org
    More information through EDIRC

    Related research

    Keywords:

    Other versions of this item:

    Find related papers by JEL classification:

    References

    References listed on IDEAS
    Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
    as in new window
    1. 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.
    2. Magnus Blomstrom & Gunnar Fors & Robert E. Lipsey, 1997. "Foreign Direct Investment and Employment: Home Country Experience in the United States and Sweden," NBER Working Papers 6205, National Bureau of Economic Research, Inc.
    3. Rankin, Neil, 1998. "Nominal rigidity and monetary uncertainty in a small open economy," Journal of Economic Dynamics and Control, Elsevier, Elsevier, vol. 22(5), pages 679-702, May.
    4. Charles Engel & John H. Rogers, 1994. "How Wide is the Border?," NBER Working Papers 4829, National Bureau of Economic Research, Inc.
    5. Helpman, Elhanan & Razin, Assaf, 1982. "A Comparison of Exchange Rate Regimes in the Presence of Imperfect Capital Markets," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 23(2), pages 365-88, June.
    6. Jonathan Eaton, 1983. "Optimal and Time Consistent Exchange Rate Management in an Overlapping Generations Economy," NBER Working Papers 1196, National Bureau of Economic Research, Inc.
    7. Joshua Aizenman & Jacob A. Frenkel, 1984. "Optimal Wage Indexation, Foreign-Exchange Intervention and Monetary Policy," NBER Working Papers 1329, National Bureau of Economic Research, Inc.
    8. Aizenman, Joshua, 1994. "Monetary and Real Shocks, Productive Capacity and Exchange Rate Regimes," Economica, London School of Economics and Political Science, London School of Economics and Political Science, vol. 61(244), pages 407-34, November.
    9. Gary Hansen, 2010. "Indivisible Labor and the Business Cycle," Levine's Working Paper Archive 233, David K. Levine.
    10. V. V. Chari & Patrick J. Kehoe & Ellen R. McGrattan, 1997. "Monetary Shocks and Real Exchange Rates in Sticky Price Models of International Business Cycles," NBER Working Papers 5876, National Bureau of Economic Research, Inc.
    11. Rogers, J.H. & Jenkins, M.A., 1993. "Haircuts or Hysteresis? Sources of Movements in Real Exchange Rates," Papers, Pennsylvania State - Department of Economics 4-93-6, Pennsylvania State - Department of Economics.
    12. Kollmann, R., 1996. "The Exchange rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities: A Quantitative Investigation," Discussion Paper, Tilburg University, Center for Economic Research 1996-67, Tilburg University, Center for Economic Research.
    13. Turnovsky, Stephen J, 1976. "The Relative Stability of Alternative Exchange Rate Systems in the Presence of Random Disturbances," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 8(1), pages 29-50, February.
    14. Rogerson, Richard, 1988. "Indivisible labor, lotteries and equilibrium," Journal of Monetary Economics, Elsevier, Elsevier, vol. 21(1), pages 3-16, January.
    15. Engel, C., 1996. "Accounting for U.S. Real Exchange Rate Changes," Discussion Papers in Economics at the University of Washington, Department of Economics at the University of Washington 96-02, Department of Economics at the University of Washington.
    16. Kimbrough, Kent P., 1983. "The information content of the exchange rate and the stability of real output under alternative exchange-rate regimes," Journal of International Money and Finance, Elsevier, Elsevier, vol. 2(1), pages 27-38, April.
    17. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
    18. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers, Princeton, Woodrow Wilson School - Public and International Affairs 193, Princeton, Woodrow Wilson School - Public and International Affairs.
    19. Lapan, Harvey E. & Enders, Walter, 1980. "Random disturbances and the choice of exchange regimes in an intergenerational model," Journal of International Economics, Elsevier, Elsevier, vol. 10(2), pages 263-283, May.
    20. Engel, C., 1996. "A Model of Foreign Exchange Rate Indetermination," Working Papers, University of Washington, Department of Economics 96-13, University of Washington, Department of Economics.
    21. Robert E. Lipsey, 1998. "Internationalized Production in Developed and Developing Countries and in Industry Sectors," NBER Working Papers 6405, National Bureau of Economic Research, Inc.
    22. 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.
    23. Harold L. Cole & Maurice Obstfeld, 1989. "Commodity Trade and International Risk Sharing: How Much Do Financial Markets Matter?," NBER Working Papers 3027, National Bureau of Economic Research, Inc.
    24. Chin, Daniel M. & Miller, Preston J., 1998. "Fixed vs. floating exchange rates: A dynamic general equilibrium analysis," European Economic Review, Elsevier, Elsevier, vol. 42(7), pages 1221-1249, July.
    25. Philippe Bacchetta & Eric Van Wincoop, 1998. "Does Exchange Rate Stability Increase Trade and Capital Flows?," NBER Working Papers 6704, National Bureau of Economic Research, Inc.
    26. Neumeyer, Pablo Andres, 1998. "Currencies and the Allocation of Risk: The Welfare Effects of a Monetary Union," American Economic Review, American Economic Association, American Economic Association, vol. 88(1), pages 246-59, March.
    27. Hau, Harald, 2000. "Exchange rate determination: The role of factor price rigidities and nontradeables," Journal of International Economics, Elsevier, Elsevier, vol. 50(2), pages 421-447, April.
    28. Irving B. Kravis & Robert E. Lipsey, 1986. "The Assessment of National Price Levels," NBER Working Papers 1912, National Bureau of Economic Research, Inc.
    29. Lars E.O. Svensson & Sweder van Wijnbergen, 1987. "Excess Capacity, Monopolistic Competition, and International Transmission of Monetary Disturbances," NBER Working Papers 2262, National Bureau of Economic Research, Inc.
    30. Engel, Charles, 1993. "Real exchange rates and relative prices : An empirical investigation," Journal of Monetary Economics, Elsevier, Elsevier, vol. 32(1), pages 35-50, August.
    31. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers, Federal Reserve Bank of Minneapolis 426, Federal Reserve Bank of Minneapolis.
    32. Irving B. Kravis & Robert E. Lipsey, 1980. "The Location of Overseas Production and Production for Export by U.S. Multinational Firms," NBER Working Papers 0482, National Bureau of Economic Research, Inc.
    33. Kravis, Irving B & Lipsey, Robert E, 1992. "Sources of Competitiveness of the United States and of Its Multinational Firms," The Review of Economics and Statistics, MIT Press, vol. 74(2), pages 193-201, May.
    34. Stephen J. Turnovsky, 1983. "Wage Indexation and Exchange Market Interventions in a Small Open Economy," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 16(4), pages 574-92, November.
    35. Hamada, Koichi & Sakurai, Makoto, 1978. "International Transmission of Stagflation under Fixed and Flexible Exchange Rates," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 86(5), pages 877-95, October.
    36. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare And Macroeconomic Interdependence," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(2), pages 421-445, May.
    37. Kravis, Irving B. & Lipsey, Robert E., 1978. "Price behavior in the light of balance of payments theories," Journal of International Economics, Elsevier, Elsevier, vol. 8(2), pages 193-246, May.
    38. Robert E. Lipsey, 1993. "Foreign Direct Investment in the United States: Changes over Three Decades," NBER Chapters, in: Foreign Direct Investment, pages 113-172 National Bureau of Economic Research, Inc.
    39. Robert E. Lipsey & Mario Schimberni & Robert V. Lindsay, 1988. "Changing Patterns of International Investment in and by the United States," NBER Chapters, in: The United States in the World Economy, pages 475-558 National Bureau of Economic Research, Inc.
    40. Flood, Robert P & Marion, Nancy Peregrim, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 97(1), pages 43-66, February.
    41. Glick, Reuven & Wihlborg, Clas, 1990. "Real exchange rate effects of monetary shocks under fixed and flexible exchange rates," Journal of International Economics, Elsevier, Elsevier, vol. 28(3-4), pages 267-290, May.
    42. Jeffrey A. Frankel, 1993. "On Exchange Rates," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262061546, December.
    43. Lipsey, Robert E & Swedenborg, Birgitta, 1996. "The High Cost of Eating: Causes of International Differences in Consumer Food Prices," Review of Income and Wealth, International Association for Research in Income and Wealth, vol. 42(2), pages 181-94, June.
    44. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
    45. Flood, Robert P, 1979. "Capital Mobility and the Choice of Exchange Rate System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 405-16, June.
    46. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, Elsevier, vol. 50(1), pages 215-244, February.
    47. Betts, Caroline & Devereux, Michael B., 1996. "The exchange rate in a model of pricing-to-market," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1007-1021, April.
    48. Sven W. Arndt & J. David Richardson, 1987. "Real-Financial Linkages Among Open Economies," NBER Working Papers 2230, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as in new window

    Cited by:
    This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

    Lists

    This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

    Statistics

    Access and download statistics

    Corrections

    When requesting a correction, please mention this item's handle: RePEc:nbr:nberch:10582. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If references are entirely missing, you can add them using this form.

    If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.