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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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    1. Ilan Goldfajn & Rodrigo O. ValdŽs, 1999. "The Aftermath Of Appreciations," The Quarterly Journal of Economics, MIT Press, vol. 114(1), pages 229-262, February.
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    7. Levy-Yeyati, Eduardo & Sturzenegger, Federico, 2005. "Classifying exchange rate regimes: Deeds vs. words," European Economic Review, Elsevier, vol. 49(6), pages 1603-1635, August.
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    17. John H. Rogers, 2001. "Price level convergence, relative prices, and inflation in Europe," International Finance Discussion Papers 699, Board of Governors of the Federal Reserve System (U.S.).
    18. William Poole, 1970. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Staff Studies 57, Board of Governors of the Federal Reserve System (U.S.).
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    20. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
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