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On the Relevance of Exchange Rate Regimes for Stabilization Policy

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  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR.)

  • Isabel Correia

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR.)

  • Bernardino Adao

    (Banco de Portugal)

Abstract

This paper assesses the relevance of the exchange rate regime for stabilization policy. Using both fiscal and monetary policy, we conclude that 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 on labor mobility. The results can be summarized with the claim that every currency area is an optimal currency area, provided labor is not mobile across countries.

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Paper provided by Society for Economic Dynamics in its series 2007 Meeting Papers with number 616.

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Date of creation: 2007
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Handle: RePEc:red:sed007:616

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