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International financial markets' influence on the welfare performance of alternative exchange rate regimes

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  • Hoffmann, Mathias
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    Abstract

    In this paper Friedmann (1953) and Mundell´s (1968) position favouring flexible over alternative exchange rate regimes is reassessed in the context of international financial market integration. In a new open economy macroeconomic framework the paper shows that financial market integration causes a monetary policy trade-off between stabilising domestic goods prices as opposed to stabilising the terms of trade. Therefore, the welfare ranking of different exchanges rate rules changes during the process of international financial integration. It becomes evident that no single exchange rate regime outperforms in stabilising both domestic consumption and output variability in the process of financial market integration. --

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    File URL: http://econstor.eu/bitstream/10419/27651/1/200827dkp.pdf
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    Bibliographic Info

    Paper provided by Deutsche Bundesbank, Research Centre in its series Discussion Paper Series 1: Economic Studies with number 2008,27.

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    Date of creation: 2008
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    Handle: RePEc:zbw:bubdp1:7566

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    Related research

    Keywords: International Financial Market Integration; Exchange Rate Rules; Optimal Monetary Policy; Welfare;

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    1. Alan Sutherland, 2002. "International monetary policy coordination and financial market integration," International Finance Discussion Papers 751, Board of Governors of the Federal Reserve System (U.S.).
    2. Robert King & Alexander L. Wolman, 1999. "What Should the Monetary Authority Do When Prices Are Sticky?," NBER Chapters, in: Monetary Policy Rules, pages 349-404 National Bureau of Economic Research, Inc.
    3. Michael B. Devereux & Charles Engel, 2000. "Monetary Policy in the Open Economy Revisited: Price Setting and Exchange Rate Flexibility," NBER Working Papers 7665, National Bureau of Economic Research, Inc.
    4. Brandt, Michael W. & Cochrane, John H. & Santa-Clara, Pedro, 2006. "International risk sharing is better than you think, or exchange rates are too smooth," Journal of Monetary Economics, Elsevier, vol. 53(4), pages 671-698, May.
    5. Alan Sutherland, 2005. "The Expenditure Switching Effect, Welfare and Monetary Policy in a Small Open Economy," The Institute for International Integration Studies Discussion Paper Series iiisdp022, IIIS.
    6. Tille, Cedric, 2005. "The welfare effect of international asset market integration under nominal rigidities," Journal of International Economics, Elsevier, vol. 65(1), pages 221-247, January.
    7. Maurice Obstfeld, 2004. "Globalization, Macroeconomic Performance, and the Exchange Rates of Emerging Economies," NBER Working Papers 10849, National Bureau of Economic Research, Inc.
    8. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
    9. Cole, Harold L. & Obstfeld, Maurice, 1991. "Commodity trade and international risk sharing : How much do financial markets matter?," Journal of Monetary Economics, Elsevier, vol. 28(1), pages 3-24, August.
    10. Corsetti, Giancarlo & Pesenti, Paolo, 2002. "International Dimensions of Optimal Monetary Policy," CEPR Discussion Papers 3349, C.E.P.R. Discussion Papers.
    11. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
    12. Adolfson, Malin & Laséen, Stefan & Lindé, Jesper & Villani, Mattias, 2005. "Bayesian Estimation of an Open Economy DSGE Model with Incomplete Pass-Through," Working Paper Series 179, Sveriges Riksbank (Central Bank of Sweden).
    13. Sutherland, Alan, 2002. "Incomplete Pass-Through and the Welfare Effects of Exchange Rate Variability," CEPR Discussion Papers 3431, C.E.P.R. Discussion Papers.
    14. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Wiley Blackwell, vol. 70(4), pages 743-764, October.
    15. Senay, Ozge & Sutherland, Alan, 2007. "Optimal monetary policy and the timing of asset trade in open economies," Economics Letters, Elsevier, vol. 95(2), pages 297-302, May.
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