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International Risk Sharing and the Choice of Exchange-Rate Regime

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  • David A. Hsieh

Abstract

This paper examines the argument that the fixed exchange rate regime should be preferred to the flexible rate regime because the former allows risk sharing across countries while the latter does not. The analysis is performed in a two-country overlapping generations model, where markets are incomplete under either exchange regime. In this second best world, it is demonstrated that the ability to share risk across countries in the fixed rate regime does not necessarily lead to higher welfare than the inability to share risk in the flexible rate regime.

Suggested Citation

  • David A. Hsieh, 1982. "International Risk Sharing and the Choice of Exchange-Rate Regime," NBER Working Papers 0842, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:0842
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    References listed on IDEAS

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    1. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66(6), pages 467-467.
    2. Lucas, Robert Jr., 1982. "Interest rates and currency prices in a two-country world," Journal of Monetary Economics, Elsevier, vol. 10(3), pages 335-359.
    3. John H. Kareken & Neil Wallace, 1978. "Samuelson's consumption-loan model with country-specific fiat monies," Staff Report 24, Federal Reserve Bank of Minneapolis.
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    Cited by:

    1. Eaton, Jonathan, 1985. "Optimal and time consistent exchange-rate management in an overlapping-generations economy," Journal of International Money and Finance, Elsevier, vol. 4(1), pages 83-100, March.

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