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Does Exchange Rate Risk Matter for Welfare?

  • Paul R. Bergin
  • Ivan Tchakarov

Volatility in exchange rates is a prominent feature of open economies, a fact which has motivated elaborate attempts in many countries at exchange rate management. This paper analyzes quantitatively the welfare effects of exchange rate risk in a general two-country environment. It finds that the effects of uncertainty tend to be small for the types of simplified cases considered in past literature. But it identifies other cases, not considered previously, in which these effects can be significantly larger. These include habit persistence, where agents are more sensitive to risk, and also incomplete asset market structures which allow for asymmetries between countries. The latter case suggests that countries which are hosts to an international reserve currency, such as the U.S. or members of the euro zone, may accrue

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 9900.

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Date of creation: Aug 2003
Date of revision:
Handle: RePEc:nbr:nberwo:9900
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