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


  • Robert P. Flood
  • Nancy Peregrim Marion


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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    References listed on IDEAS

    1. Yew-Kwang Ng & Mendel Weisser, 1974. "Optimal Pricing with a Budget Constraint—The Case of the Two-part Tariff," Review of Economic Studies, Oxford University Press, vol. 41(3), pages 337-345.
    2. Martin S. Feldstein, 1972. "Equity and Efficiency in Public Sector Pricing: The Optimal Two-Part Tariff," The Quarterly Journal of Economics, Oxford University Press, vol. 86(2), pages 175-187.
    3. Robert D. Willig, 1978. "Pareto-Superior Nonlinear Outlay Schedules," Bell Journal of Economics, The RAND Corporation, vol. 9(1), pages 56-69, Spring.
    4. Sheshinski, Eytan, 1976. "Price, Quality and Quantity Regulation in Monopoly Situations," Economica, London School of Economics and Political Science, vol. 43(17), pages 127-137, May.
    5. Elizabeth E. Bailey & Lawrence J. White, 1974. "Reversals in Peak and Offpeak Prices," Bell Journal of Economics, The RAND Corporation, vol. 5(1), pages 75-92, Spring.
    6. Boiteux, M., 1971. "On the management of public monopolies subject to budgetary constraints," Journal of Economic Theory, Elsevier, vol. 3(3), pages 219-240, September.
    7. Waverman, Leonard, 1975. "Peak-Load Pricing under Regulatory Constraint: A Proof of Inefficiency," Journal of Political Economy, University of Chicago Press, vol. 83(3), pages 645-654, June.
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