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Trade Openness and Exchange Rate Regimes

Author

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  • ONDRA KAMENIK
  • MICHAEL KUMHOF

Abstract

The paper evaluates the net welfare gains of inflation targeting over a fixed exchange rate as a function of a country's trade openness, using a multisectoral structural model calibrated to Chile. For most calibrations with separable preferences, net welfare gains are increasing in trade openness. The reason is that in more open economies terms of trade shocks, which favor inflation targeting, become quantitatively more important, while price markup shocks in the imperfectly competitive nontradables sector, which favor exchange rate targeting, become less important. The most important exception is heavily indebted countries, where net welfare gains are decreasing in trade openness.

Suggested Citation

  • Ondra Kamenik & Michael Kumhof, 2014. "Trade Openness and Exchange Rate Regimes," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 46(8), pages 1657-1686, December.
  • Handle: RePEc:wly:jmoncb:v:46:y:2014:i:8:p:1657-1686
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    File URL: http://hdl.handle.net/10.1111/jmcb.12162
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    References listed on IDEAS

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    Cited by:

    1. Ippei Fujiwara & Scott Davis, 2017. "Dealing with Time-inconsistency: Inflation Targeting vs. Exchange Rate Targeting," 2017 Meeting Papers 795, Society for Economic Dynamics.

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