Fixed vs. floating exchange rates: a dynamic general equilibrium analysis
In this study we contrast fixed and floating exchange rate regimes in a dynamic general equilibrium model. We find that the fundamental difference in the regimes is in the courses they imply for monetary policies. Because of policy coordination requirements, a tighter monetary policy needed to maintain a fixed exchange rate may necessitate a tightening in budget policy as well. We show that under some initial conditions voters or a social planner will favor one regime, but under other conditions they will favor the other. However, the choices of voters and a social planner are almost diametrically opposed.
|Date of creation:||1995|
|Date of revision:|
|Publication status:||Published in European Economic Review (Vol 42, 1998, pp. 1221-1249)|
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- Sergio Rebelo, 1997.
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