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Trade and Welfare Under Alternative Exchange Rate Regimes

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  • Singh, Rajesh

Abstract

This paper compares the welfare under two standard alternative exchange rate regimes, fixed and flexible, in a stochastic dynamic general equilibrium two-country setting. Conventional wisdom holds that countries often prefer low exchange-rate variability to stabilize trade. This may explain the observed `fear of floating' in emerging markets -- although most of them claim to adopt a flexible system, in reality they often intervene to peg. We show that under incomplete capital markets a fixed exchange rate regime unambiguously increases trade and improves welfare. This provides a potential explanation for the observed exchange rate policies in emerging markets.

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  • Singh, Rajesh, 2023. "Trade and Welfare Under Alternative Exchange Rate Regimes," ISU General Staff Papers 202311061509510000, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genstf:202311061509510000
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    References listed on IDEAS

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    1. Jeffrey Frankel & Sergio Schmukler & Luis Serven, 2000. "Verifiability and the Vanishing Intermediate Exchange Rate Regime," NBER Working Papers 7901, National Bureau of Economic Research, Inc.
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