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Does exchange rate variability matter for welfare? A quantitative investigation of stabilization policies

  • Bergin, Paul R.
  • Shin, Hyung-Cheol
  • Tchakarov, Ivan

This paper evaluates quantitatively the potential welfare gains from monetary policy and fixed exchange rate rules in a two-country sticky-price model. The first finding is that the gains from stabilization tend to be small in the types of economic environments emphasized in recent theoretical literature. The analysis goes on to identify two types of economies in which the welfare implications of risk are larger: where agents exhibit habits, and where international asset markets exhibit asymmetry in the form of ?original sin.? In the habits case, monetary policy aimed solely at inflation stabilization is optimal. But in the original sin case there are potentially large welfare gains from also eliminating exchange rate volatility.

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Article provided by Elsevier in its journal European Economic Review.

Volume (Year): 51 (2007)
Issue (Month): 4 (May)
Pages: 1041-1058

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Handle: RePEc:eee:eecrev:v:51:y:2007:i:4:p:1041-1058
Contact details of provider: Web page: http://www.elsevier.com/locate/eer

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  2. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
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  5. Schmitt-Grohe, Stephanie & Uribe, Martin, 2004. "Solving dynamic general equilibrium models using a second-order approximation to the policy function," Journal of Economic Dynamics and Control, Elsevier, vol. 28(4), pages 755-775, January.
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  7. Christopher A. Sims & Jinill Kim & Sunghyun Kim, 2004. "Calculating and Using Second Order Accurate Solution of Discrete Time Dynamic Equilibrium Models," Econometric Society 2004 North American Winter Meetings 411, Econometric Society.
  8. Paul R. Bergin & Robert C. Feenstra, "undated". "Pricing To Market, Staggered Contracts, And Real Exchange Rate Persistence," Department of Economics 99-01, California Davis - Department of Economics.
  9. Harrigan, James, 1993. "OECD imports and trade barriers in 1983," Journal of International Economics, Elsevier, vol. 35(1-2), pages 91-111, August.
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  12. Maurice Obstfeld & Kenneth Rogoff, 2000. "Do We Really Need a New International Monetary Compact?," NBER Working Papers 7864, National Bureau of Economic Research, Inc.
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  15. Christiano, Lawrence J. & Eichenbaum, Martin & Evans, Charles L., 1997. "Sticky price and limited participation models of money: A comparison," European Economic Review, Elsevier, vol. 41(6), pages 1201-1249, June.
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  17. Giancarlo Corsetti & Paolo Pesenti, 2001. "Welfare and Macroeconomic Interdependence," The Quarterly Journal of Economics, Oxford University Press, vol. 116(2), pages 421-445.
  18. Collard, Fabrice & Juillard, Michel, 1999. "Accuracy of stochastic perturbuation methods: the case of asset pricing models," CEPREMAP Working Papers (Couverture Orange) 9922, CEPREMAP.
  19. Robert Kollmann, 2002. "Monetary policy rules in the open economy: effects of welfare and business cycles," ULB Institutional Repository 2013/7628, ULB -- Universite Libre de Bruxelles.
  20. Obstfeld, M., 1998. "Risk and Exchange Rate," Papers 193, Princeton, Woodrow Wilson School - Public and International Affairs.
  21. Gianluca Benigno & Pierpaolo Benigno, 2003. "Price Stability in Open Economies," Review of Economic Studies, Oxford University Press, vol. 70(4), pages 743-764.
  22. G. Constantinides, 1990. "Habit formation: a resolution of the equity premium puzzle," Levine's Working Paper Archive 1397, David K. Levine.
  23. Jeffrey C. Fuhrer, 2000. "Habit Formation in Consumption and Its Implications for Monetary-Policy Models," American Economic Review, American Economic Association, vol. 90(3), pages 367-390, June.
  24. Bergin, Paul R., 2003. "Putting the 'New Open Economy Macroeconomics' to a test," Journal of International Economics, Elsevier, vol. 60(1), pages 3-34, May.
  25. Eric van Wincoop & Philippe Bacchetta, 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?," American Economic Review, American Economic Association, vol. 90(5), pages 1093-1109, December.
  26. Robert Kollmann, 2004. "Welfare Effects of a Monetary Union: The Role of Trade Openness," Journal of the European Economic Association, MIT Press, vol. 2(2-3), pages 289-301, 04/05.
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