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Exchange rate policy and firm dynamics

Author

Listed:
  • Masahige Hamano

    (Waseda University)

  • Francesco Pappadà

    (Paris School of Economics and Banque de France)

Abstract

This paper examines the exchange rate policy in a two-country model with nom- inal wage rigidities and firm dynamics. We show that a exible exchange rate is unable to replicate the exible price allocation under incomplete financial markets. In our setting with heterogeneous firms, a monetary intervention dampens nominal exchange rate uctuations and stabilizes the firm selection in the export market. The reduction in wage setting uncertainty ensured by a fixed exchange rate is par- ticularly relevant when firms are small and homogeneous, thus providing a rationale for currency manipulation in exchange rate policies.

Suggested Citation

  • Masahige Hamano & Francesco Pappadà, 2021. "Exchange rate policy and firm dynamics," Working Papers 2018, Waseda University, Faculty of Political Science and Economics.
    • Handle: RePEc:wap:wpaper:2018
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    More about this item

    Keywords

    exchange rate policy; firm heterogeneity; nominal rigidities;
    All these keywords.

    JEL classification:

    • F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • E40 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - General

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