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On the Relevance of Exchange Rate Regimes for Stabilization Policy

Author

Listed:
  • Pedro Teles

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR.)

  • Isabel Correia

    (Banco de Portugal, Universidade Catolica Portuguesa and CEPR.)

  • Bernardino Adao

    (Banco de Portugal)

Abstract

This paper assesses the relevance of the exchange rate regime for stabilization policy. Using both fiscal and monetary policy, we conclude that the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms and regardless of the incompleteness of international financial markets. The only relevant condition is on labor mobility. The results can be summarized with the claim that every currency area is an optimal currency area, provided labor is not mobile across countries.

Suggested Citation

  • Pedro Teles & Isabel Correia & Bernardino Adao, 2007. "On the Relevance of Exchange Rate Regimes for Stabilization Policy," 2007 Meeting Papers 616, Society for Economic Dynamics.
  • Handle: RePEc:red:sed007:616
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    More about this item

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization; Treasury Policy
    • F20 - International Economics - - International Factor Movements and International Business - - - General
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F42 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - International Policy Coordination and Transmission

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