Does Exchange-Rate Stability Increase Trade and Welfare?
- Bacchetta, Philippe Study Center Gerzensee, 3115 Gerzensee, Switzerland, and University of Lausanne.
- van Wincoop, Eric International Research, Federal Reserve Bank of New York, 33 Liberty Street, New York, NY 10045.
Published in:
- American Economic Review. - American Economic Association. - 2000, vol. 90, no. 5, p. 1093-1109
English
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)
- Language
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- English
- Open access status
- green
- Identifiers
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- DOI 10.1257/aer.90.5.1093
- ISSN 0002-8282
- Persistent URL
- https://sonar.ch/global/documents/161325
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