The Benefit of Exchange Rate Flexibility, Trade Openness and Extensive Margin
AbstractThe literature on optimum currency areas argues that in the presence of countryspecific real shocks, the cost of fixing exchange rates is decreasing in the degree of trade openness. This study uses a stochastic dynamic general equilibrium model of endogenous specialization to assess the benefit of exchange rate flexibility. The benefit of exchange rate flexibility consists of the benefit along the extensive margin through adjustment in the composition of trade, and the benefit along the intensive margin through adjustment in the relative prices. Openness is found to influence these two benefits differently. Thus, the model predicts a non-monotonic relationship between openness and the benefit of exchange rate flexibility.
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Bibliographic InfoPaper provided by Purdue University, Department of Economics in its series Purdue University Economics Working Papers with number 1215.
Length: 30 pages
Date of creation: Nov 2008
Date of revision:
Exchange rate regimes; Trade costs; Openness;
Find related papers by JEL classification:
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
- F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission
This paper has been announced in the following NEP Reports:
- NEP-ALL-2009-01-24 (All new papers)
- NEP-CBA-2009-01-24 (Central Banking)
- NEP-DGE-2009-01-24 (Dynamic General Equilibrium)
- NEP-IFN-2009-01-24 (International Finance)
- NEP-OPM-2009-01-24 (Open Economy Macroeconomic)
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- Masashige Hamano & Pierre M. Picard, 2013. "Extensive and intensive margins and the choice of exchange rate regimes," CREA Discussion Paper Series 13-18, Center for Research in Economic Analysis, University of Luxembourg.
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