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Trade and Welfare Under Alternative Exchange Rate Regimes

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  • Singh, Rajesh

Abstract

This paper compares the welfare under two standard alternative exchange rate regimes, fixed and flexible, in a stochastic dynamic general equilibrium two-country setting. Conventional wisdom holds that countries often prefer low exchange-rate variability to stabilize trade. This may explain the observed `fear of floating' in emerging markets -- although most of them claim to adopt a flexible system, in reality they often intervene to peg. We show that under incomplete capital markets a fixed exchange rate regime unambiguously increases trade and improves welfare. This provides a potential explanation for the observed exchange rate policies in emerging markets.

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  • Singh, Rajesh, 2004. "Trade and Welfare Under Alternative Exchange Rate Regimes," Staff General Research Papers Archive 11463, Iowa State University, Department of Economics.
    • Handle: RePEc:isu:genres:11463
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    File URL: http://www2.econ.iastate.edu/papers/p3831-2004-02-26.pdf
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    References listed on IDEAS

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    More about this item

    Keywords

    optimal exchange rates;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General

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