Does Exchange-Rate Stability Increase Trade and Welfare?
- (pp. 1093-1109)
AbstractThis 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.
CitationBacchetta, Philippe, and Eric van Wincoop. 2000. "Does Exchange-Rate Stability Increase Trade and Welfare?" American Economic Review, 90 (5): 1093-1109. DOI: 10.1257/aer.90.5.1093
- F31 Foreign Exchange
- F41 Open Economy Macroeconomics