Does Exchange-Rate Stability Increase Trade and Welfare?
- 1 December 2000
- journal article
- Published by American Economic Association in American Economic Review
- Vol. 90 (5) , 1093-1109
- https://doi.org/10.1257/aer.90.5.1093
Abstract
This paper develops a simple general-equilibrium framework to study the effect of the exchange-rate system on trade and welfare. An important feature of the model is deviations from purchasing-power parity, caused by rigid price setting in buyers' currency. In a benchmark model with separable preferences and only monetary shocks, trade is unaffected by the exchange-rate system, consistent with most evidence. In general, both trade and welfare can be higher under either exchange-rate system, depending on preferences and on the monetary-policy rules followed under each system. There is no one-to-one relationship between the levels of trade and welfare across exchange-rate systems. (JEL F31, F33, F41)Keywords
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