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Fixed vs. floating exchange rates: a dynamic general equilibrium analysis

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  • Dan Chin
  • Preston J. Miller
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    Abstract

    In this study we contrast fixed and floating exchange rate regimes in a dynamic general equilibrium model. We find that the fundamental difference in the regimes is in the courses they imply for monetary policies. Because of policy coordination requirements, a tighter monetary policy needed to maintain a fixed exchange rate may necessitate a tightening in budget policy as well. We show that under some initial conditions voters or a social planner will favor one regime, but under other conditions they will favor the other. However, the choices of voters and a social planner are almost diametrically opposed.

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    Bibliographic Info

    Paper provided by Federal Reserve Bank of Minneapolis in its series Staff Report with number 194.

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    Date of creation: 1995
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    Publication status: Published in European Economic Review (Vol 42, 1998, pp. 1221-1249)
    Handle: RePEc:fip:fedmsr:194

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    Related research

    Keywords: Foreign exchange rates;

    References

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    1. Preston J. Miller & Neil Wallace, 1985. "International coordination of macroeconomic policies: a welfare analysis," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
    2. Preston J. Miller & Richard M. Todd, 1992. "Real effects of monetary policy in a world economy," Staff Report 154, Federal Reserve Bank of Minneapolis.
    3. Rebelo, Sérgio, 1997. "What Happens When Countries Peg Their Exchange Rates? (The Real Side of Monetary Reforms)," CEPR Discussion Papers 1692, C.E.P.R. Discussion Papers.
    4. Thomas J. Sargent & Neil Wallace, 1981. "Some unpleasant monetarist arithmetic," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Fall.
    5. Michael J. Stutzer, 1985. "The statewide economic impact of small-issue industrial revenue bonds," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Spr.
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