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On the Relevance of Exchange Rate Regimes for Stabilization Policy

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  • Bernardino Adão
  • Isabel Horta Correia
  • Pedro Teles

Abstract

This paper assesses the relevance of the exchange rate regime for stabilization policy. This regime question cannot be dealt with independently of other institutions, in particular how .fiscal policy is designed. We show that once .fiscal policy is taken into account, the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms and regardless of the incompleteness of international .financial markets. The only relevant condition is labor mobility. The imobility of labor across countries is a necessary condition for our results.

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Paper provided by Banco de Portugal, Economics and Research Department in its series Working Papers with number w200616.

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Date of creation: 2006
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Handle: RePEc:ptu:wpaper:w200616

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