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Extensive and intensive margins and the choice of exchange rate regimes

  • Masashige Hamano


    (Sophia University, Tokyo)

  • Pierre M. Picard


    (CREA, Université du Luxembourg)

This paper studies how the choice of fixed or flexible exchange rate regimes is affected by the existence of intensive and extensive margins. We study two models where firms enter during or before each period of production. We show how the the choice of those regimes depend on the level and the volatily of the intensive and extensive margins as well as on the congruence between consumers' preferences and the supply and diversity of products. We show that fixed exchange rate regimes are preferred for high enough labor supply elasticities. Fixed exchange rate regimes are unambigously better when entry occurs at the same time as production in each period. Fixed exchange rate regimes are less attractive in the presence of production lags and higher love of product diversity.

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Paper provided by Center for Research in Economic Analysis, University of Luxembourg in its series CREA Discussion Paper Series with number 13-18.

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Date of creation: 2013
Date of revision:
Handle: RePEc:luc:wpaper:13-18
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  1. Maurice Obstfeld & Kenneth Rogoff, 1994. "Exchange Rate Dynamics Redux," NBER Working Papers 4693, National Bureau of Economic Research, Inc.
  2. Baldwin, Richard & Di Nino, Virginia, 2006. "Euros and Zeros: The Common Currency Effect on Trade in New Goods," CEPR Discussion Papers 5973, C.E.P.R. Discussion Papers.
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  4. Hamano, Masashige, 2013. "The consumption-real exchange rate anomaly with extensive margins," Journal of International Money and Finance, Elsevier, vol. 36(C), pages 26-46.
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  8. Vivien Lewis, 2009. "Optimal monetary policy and firm entry," Working Paper Research 178, National Bank of Belgium.
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  10. Paul Krugman, 1990. "Increasing Returns and Economic Geography," NBER Working Papers 3275, National Bureau of Economic Research, Inc.
  11. Dixit, Avinash K & Stiglitz, Joseph E, 1975. "Monopolistic Competition and Optimum Product Diversity," The Warwick Economics Research Paper Series (TWERPS) 64, University of Warwick, Department of Economics.
  12. Giancarlo Corsetti & Paolo Pesenti, 2005. "The simple geometry of transmission and stabilization in closed and open economies," Economics Working Papers ECO2005/26, European University Institute.
  13. Florin Bilbiie & Fabio Ghironi & Marc Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," Université Paris1 Panthéon-Sorbonne (Post-Print and Working Papers) hal-00622866, HAL.
  14. Hamano Masashige, 2012. "International equity and bond positions in a DSGE model with variety risk in consumption," CREA Discussion Paper Series 12-05, Center for Research in Economic Analysis, University of Luxembourg.
  15. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, vol. 62(2), pages 359-377, March.
  16. Benassy, Jean-Pascal, 1996. "Taste for variety and optimum production patterns in monopolistic competition," Economics Letters, Elsevier, vol. 52(1), pages 41-47, July.
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  18. Bergin, Paul R. & Corsetti, Giancarlo, 2008. "The extensive margin and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1222-1237, October.
  19. Pierre M. Picard & Tim Worrall, 2009. "Currency Unions and International Assistance," CREA Discussion Paper Series 09-01, Center for Research in Economic Analysis, University of Luxembourg.
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