IDEAS home Printed from https://ideas.repec.org/p/nbr/nberwo/0748.html
   My bibliography  Save this paper

Aspects of the Optimal Management of Exchange Rates

Author

Listed:
  • Jacob A. Frenkel
  • Joshua Aizenman

Abstract

This paper analyzes aspects of the economics of the optimal management of exchange rates. It shows that the choice of the optimal exchange rate regime depends on the nature and the origin of the stochastic shocks that affect the economy. Generally, the higher is the variance of real shocks which affect the supply of goods, the larger becomes the desirability of fixity of exchange rates. The rationale for that implication is that the balance of payments serves as a shock absorber which mitigates the effect of real shocks on consumption. The importance of this factor diminishes the larger is the economy's access to world capital markets. On the other hand, the desirability of exchange rate flexibility increases the larger are the variances of the shocks to the demand for money, to the supply of money, to foreign prices and to purchasing power parities. All of these shocks exert a similar effect and their sum is referred to as the "effective monetary shock." It is also shown that the desirability of exchange rate flexibility increases the larger is the propensity to save out of transitory income. When the analysis is extended to an economy which produces traded and non-traded goods it is shown that the desirability of exchange rate flexibility diminishes the higher is the share of non-traded goods relative to traded goods and the lower are the elasticities of demand and supply of the two goods.

Suggested Citation

  • Jacob A. Frenkel & Joshua Aizenman, 1981. "Aspects of the Optimal Management of Exchange Rates," NBER Working Papers 0748, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:0748
    Note: ITI EFG IFM
    as

    Download full text from publisher

    File URL: http://www.nber.org/papers/w0748.pdf
    Download Restriction: no

    Other versions of this item:

    References listed on IDEAS

    as
    1. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-1055, December.
    2. Gray, Jo Anna, 1976. "Wage indexation: A macroeconomic approach," Journal of Monetary Economics, Elsevier, vol. 2(2), pages 221-235, April.
    3. Flood, Robert P, 1979. "Capital Mobility and the Choice of Exchange Rate System," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 20(2), pages 405-416, June.
    4. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    5. Lucas, Robert E, Jr, 1973. "Some International Evidence on Output-Inflation Tradeoffs," American Economic Review, American Economic Association, vol. 63(3), pages 326-334, June.
    6. Enders, Walter & Lapan, Harvey E., 1979. "Stability, Random Disturbances, and the Exchange Rate Regime," ISU General Staff Papers 197907010700001067, Iowa State University, Department of Economics.
    7. Lucas, Robert E, Jr & Rapping, Leonard A, 1969. "Real Wages, Employment, and Inflation," Journal of Political Economy, University of Chicago Press, vol. 77(5), pages 721-754, Sept./Oct.
    Full references (including those not matched with items on IDEAS)

    More about this item

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:0748. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: () or (Joanne Lustig). General contact details of provider: http://edirc.repec.org/data/nberrus.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.