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The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing

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  • Robert P. Flood
  • Nancy Peregrim Marion

Abstract

The paper develops a general stochastic macroeconomic model that can be used to study the international transmission of disturbances under four alternative exchange-rate systems: uniform flexible exchange rates, uniform fixed exchange rates, and two versions of two-tier exchange rates. The analysis makes two general points. First, one cannot assume stability of structure when assessing the consequences of alternative exchange-rate regimes. For example, the slope of the aggregate supply curve and the rationally formed expectations in the asset markets can respond dramatically to the government's choice of exchange-rate regime. Second, exchange-rate regimes that provide full insulation from foreign disturbances may nevertheless be inferior to other regimes in terms of their ability to maximize social welfare.

Suggested Citation

  • Robert P. Flood & Nancy Peregrim Marion, 1982. "The Transmission of Disturbances under Alternative Exchange-Rate Regimes with Optimal Indexing," The Quarterly Journal of Economics, Oxford University Press, vol. 97(1), pages 43-66.
  • Handle: RePEc:oup:qjecon:v:97:y:1982:i:1:p:43-66.
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    File URL: http://hdl.handle.net/10.2307/1882626
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