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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. Corsetti, Giancarlo & Dedola, Luca & Leduc, Sylvain, 2010. "Optimal Monetary Policy in Open Economies," Handbook of Monetary Economics, in: Benjamin M. Friedman & Michael Woodford (ed.), Handbook of Monetary Economics, edition 1, volume 3, chapter 16, pages 861-933 Elsevier.
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  8. Giancarlo Corsetti & Paolo Pesenti, 2001. "International dimensions of optimal monetary policy," Staff Reports 124, Federal Reserve Bank of New York.
  9. Giancarlo Corsetti & Paolo Pesenti, 2005. "The Simple Geometry of Transmission and Stabilization in Closed and Open Economies," NBER Working Papers 11341, National Bureau of Economic Research, Inc.
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  12. Hamano, Masashige, 2015. "International equity and bond positions in a DSGE model with variety risk in consumption," Journal of International Economics, Elsevier, vol. 96(1), pages 212-226.
  13. Florin O. Bilbiie & Fabio Ghironi & Marc J. Melitz, 2008. "Monetary Policy and Business Cycles with Endogenous Entry and Product Variety," NBER Chapters, in: NBER Macroeconomics Annual 2007, Volume 22, pages 299-353 National Bureau of Economic Research, Inc.
  14. Masashige Hamano, 2013. "The consumption-real exchange rate anomaly with extensive margins," CREA Discussion Paper Series 13-01, Center for Research in Economic Analysis, University of Luxembourg.
  15. 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.
  16. Kanda Naknoi, 2005. "Real exchange rate fluctuations, endogenous tradability and exchange rate regime," International Finance 0509004, EconWPA, revised 07 Nov 2005.
  17. Devereux, Michael B., 2004. "Should the exchange rate be a shock absorber?," Journal of International Economics, Elsevier, vol. 62(2), pages 359-377, March.
  18. Kanda Naknoi, 2008. "The Benefit of Exchange Rate Flexibility, Trade Openness and Extensive Margin," Purdue University Economics Working Papers 1215, Purdue University, Department of Economics.
  19. Bergin, Paul R. & Corsetti, Giancarlo, 2008. "The extensive margin and monetary policy," Journal of Monetary Economics, Elsevier, vol. 55(7), pages 1222-1237, October.
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