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Can Endogenous Changes in Price Flexibility Alter the Relative Welfare Performance of Exchange Rate Regimes?

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  • Ozge Senay
  • Alan Sutherland

Abstract

A dynamic general equilibrium model of a small open economy is presented where agents may choose the frequency of price changes. A fixed exchange rate is compared to inflation targeting and money targeting. A fixed rate generates more price flexibility than the other regimes when the expenditure switching effect is relatively weak, while money targeting generates more flexibility when the expenditure switching effect is strong. These endogenous changes in price flexibility can lead to changes in the welfare performance of regimes. But, for the model calibration considered here, the extra price flexibility generated by a peg does not compensate for the loss of monetary independence. Inflation targeting yields the highest welfare level despite generating the least price flexibility of the three regimes considered.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11092.

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Date of creation: Jan 2005
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Publication status: published as Can Endogenous Changes in Price Flexibility Alter the Relative Welfare Performance of Exchange Rate Regimes? , Ozge Senay, Alan Sutherland. in NBER International Seminar on Macroeconomics 2004 , Clarida, Frankel, Giavazzi, and West. 2006
Handle: RePEc:nbr:nberwo:11092

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  1. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 70(4), pages 743-764, October.
  2. Pierpaolo Benigno, 2008. "Price stability with imperfect financial integration," Proceedings, Board of Governors of the Federal Reserve System (U.S.), Board of Governors of the Federal Reserve System (U.S.).
  3. James E. Anderson & Eric van Wincoop, 2004. "Trade Costs," NBER Working Papers 10480, National Bureau of Economic Research, Inc.
  4. Alogoskoufis, George S & Smith, Ron, 1991. "The Phillips Curve, the Persistence of Inflation, and the Lucas Critique: Evidence from Exchange-Rate Regimes," American Economic Review, American Economic Association, American Economic Association, vol. 81(5), pages 1254-75, December.
  5. Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, American Economic Association, vol. 90(5), pages 1093-1109, December.
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Cited by:
  1. McAdam, Peter & Willman, Alpo, 2007. "State-dependency and firm-level optimization: a contribution to Calvo price staggering," Working Paper Series, European Central Bank 0806, European Central Bank.
  2. Ozge Senay & Alan Sutherland, 2010. "Endogenous Price Flexibility and Optimal Monetary Policy," CDMA Working Paper Series, Centre for Dynamic Macroeconomic Analysis 201007, Centre for Dynamic Macroeconomic Analysis.

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