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Uncertainty, exchange rate regimes, and national price levels

  • Christian Broda
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    Large differences in national price levels exist across countries. In this paper, I develop a general equilibrium model predicting that these differences should be related to countries’ exchange rate regimes. My empirical findings confirm that countries with fixed exchange rate regimes have higher national price levels than countries with flexible regimes. At the disaggregate level, the relationship between exchange rate regimes and national price levels is stronger for nontraded goods than for traded goods. I also find that measuring the misalignment in national price levels around times of regime shifts without considering a break in its equilibrium value results in the overestimation of the true misalignment.

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    Paper provided by Federal Reserve Bank of New York in its series Staff Reports with number 151.

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    Date of creation: 2002
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    Handle: RePEc:fip:fednsr:151
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    6. Flood, Robert P & Rose, Andrew K, 1993. "Fixing Exchange Rates: A Virtual Quest for Fundamentals," CEPR Discussion Papers 838, C.E.P.R. Discussion Papers.
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    15. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
    16. Giancarlo Corsetti & Paolo Pesenti, 1997. "Welfare and Macroeconomic Interdependence," NBER Working Papers 6307, National Bureau of Economic Research, Inc.
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    21. Christian Broda, 2001. "Coping with Terms-of-Trade Shocks: Pegs versus Floats," American Economic Review, American Economic Association, vol. 91(2), pages 376-380, May.
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