Tim Worrall () (Department of Economics Keele University) Pierre M. Picard () (University of Manchester, School of Social Sciences, Department of Economics)
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This paper considers a simple stochastic model of international trade with three countries. Two of the tree countries are in an economic union. Comparisons are made between equilibrium welfare for these two countries under fixed and flexible exchange rate regimes. Within the model it is shown that flexible exchange rate regimes generate greater welfare. However, we then consider comparisons of welfare when the two countries also engage in some international assistance in order to share risk. Such risk-sharing is limited by enforcement constraints of cross border assistance. It is shown that taking into account limited commitment risk-sharing fixed exchange rates or currency areas can dominate flexible exchange rate regimes reversing the previous result.
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Paper provided by Centre for Economic Research, Keele University in its series Keele Economics Research Papers with number
KERP 2007/01.
Length: 22 pages Date of creation: Jan 2007 Date of revision: Handle: RePEc:kee:kerpuk:2007/01
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Order Information: Postal: Centre for Economic Research, Research Institute for Public Policy and Management, Keele University, Staffordshire ST5 5BG - United Kingdom Email: Web: http://www.keele.ac.uk/depts/ec/cer/pubs_kerps.htm
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