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Does Exchange Rate Risk Matter for Welfare?

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Author Info
Paul R. Bergin
Ivan Tchakarov

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Abstract

Volatility in exchange rates is a prominent feature of open economies, a fact which has motivated elaborate attempts in many countries at exchange rate management. This paper analyzes quantitatively the welfare effects of exchange rate risk in a general two-country environment. It finds that the effects of uncertainty tend to be small for the types of simplified cases considered in past literature. But it identifies other cases, not considered previously, in which these effects can be significantly larger. These include habit persistence, where agents are more sensitive to risk, and also incomplete asset market structures which allow for asymmetries between countries. The latter case suggests that countries which are hosts to an international reserve currency, such as the U.S. or members of the euro zone, may accrue

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9900.

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Date of creation: Aug 2003
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Handle: RePEc:nbr:nberwo:9900

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Find related papers by JEL classification:
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
O31 - Economic Development, Technological Change, and Growth - - Technological Change - - - Innovation and Invention: Processes and Incentives
B31 - Schools of Economic Thought and Methodology - - History of Thought: Individuals - - - Individuals

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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.:
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    Other versions:
Full references

Cited by:
(explanations, 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.)

  1. Ester Faia & Tommaso Monacelli, . "Ramsey Monetary Policy and International Relative Prices," Working Papers 254, IGIER (Innocenzo Gasparini Institute for Economic Research), Bocconi University. [Downloadable!]
    Other versions:
  2. Mark Crosby & Tim Kam & Kirdan Lees, 2006. "How costly is exchange rate stabilisation for an inflation targeter? The case of Australia," Reserve Bank of New Zealand Discussion Paper Series DP2006/07, Reserve Bank of New Zealand. [Downloadable!]
  3. Paul Bergin, 2004. "Measuring the costs of exchange rate volatility," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Aug 20. [Downloadable!]
  4. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and using second order accurate solutions of discrete time dynamic equilibrium models," Finance and Economics Discussion Series 2003-61, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
    Other versions:
  5. Uluc Aysun, 2006. "Automatic Stabilizer Feature of Fixed Exchange Rate Regimes in Emerging Markets," Working papers 2006-27, University of Connecticut, Department of Economics. [Downloadable!]
  6. Michel Juillard & Philippe Karam & Douglas Laxton & Paolo Pesenti, 2006. "Welfare-based monetary policy rules in an estimated DSGE model of the US economy," Working Paper Series 613, European Central Bank. [Downloadable!]
  7. Roland Straub & Ivan Tchakarov, 2004. "Non-fundamental exchange rate volatility and welfare," Working Paper Series 328, European Central Bank. [Downloadable!]
  8. Jinill Kim & Sunghyun Kim & Ernst Schaumburg & Christopher A. Sims, 2003. "Calculating and Using Second Order Accurate Solutions of Discrete Time," Levine's Bibliography 666156000000000284, UCLA Department of Economics. [Downloadable!]
  9. Ivan Tchakarov & Selim Elekdag, 2004. "Balance Sheets, Exchange Rate Policy, and Welfare," IMF Working Papers 04/63, International Monetary Fund. [Downloadable!]
  10. Matthias Paustian, 2005. "The role of contracting schemes for the welfare costs of nominal rigidities," Computing in Economics and Finance 2005 196, Society for Computational Economics. [Downloadable!]
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