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Optimal and Sustainable Exchange Rate Regimes: A Two-Country Game-Theoretic Approach

Author

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  • Masahiro Kawai

    (International Monetary Fund)

Abstract

This paper attempts to identify optimal and sustainable exchange rate regimes in a world economy comprising two countries. By developing a Barro-Gordon two-country macroeconomic model, noncooperative equilibria are obtained under different assumptions of monetary policy commitments and different exchange rate regimes. Then, using a three-stage game approach to the strategic choice of monetary policy instruments, optimal and sustainable exchange rate regimes are identified. Determining such regimes depends fundamentally on the authorities' ability to make monetary policy commitments. The results indicate that international coordination of regime choice may be necessary to ensure optimal outcomes.

Suggested Citation

  • Masahiro Kawai, 1993. "Optimal and Sustainable Exchange Rate Regimes: A Two-Country Game-Theoretic Approach," IMF Staff Papers, Palgrave Macmillan, vol. 40(2), pages 329-368, June.
  • Handle: RePEc:pal:imfstp:v:40:y:1993:i:2:p:329-368
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    Citations

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    Cited by:

    1. Kuo-Chun Yeh, 2013. "An Asian Currency Unit: Simulations for Its Effects on East Asia," The World Economy, Wiley Blackwell, vol. 36(12), pages 1611-1631, December.
    2. Maa[beta], Henrich & Sell, Friedrich L., 1998. "Confident expectations, rational expectations and the optimal conduct of monetary policy," Economic Modelling, Elsevier, vol. 15(4), pages 519-541, October.

    More about this item

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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