Expenditure Switching vs. Real Exchange Rate Stabilization: Competing Objectives for Exchange Rate Policy
By Mick Devereux, Charles M. Engel. Social Science Research Network, 2007
138 citations recorded by the source corpus.
This paper develops a view of exchange rate policy as a trade-off between the desire to smooth fluctuations in real exchange rates so as to reduce distortions in consumption allocations, and the need to allow flexibility in the nominal exchange rate so as to facilitate terms of trade adjustment. We show that optimal nominal exchange rate volatility will reflect these competing objectives. The key determinants of how much the exchange rate should respond to shocks will depend on the extent and source of price stickiness, the elasticity of substitution between home and foreign goods, and the amount of home bias in production. Quantitatively, we find the optimal exchange rate volatility should be significantly less than would be inferred based solely on terms of trade considerations. Moreover, we find that the relationship between price stickiness and optimal exchange rate volatility may be non-monotonic.
Subfields: Economics and Econometrics, Finance
View Paper: https://www.semanticscholar.org/paper/264a5ceefee697e1758c0a9692a8d9ffc8229608
How researchers see this paper
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In Economics and Econometrics
- Roberto Rigobon
- Alberto Cavallo
- Brent Neiman
- Christian Upper
- B. Candelon
- J. Radford
- David M. J. Lazer
- Jeffrey A. Frankel
In Finance
- Alberto Cavallo
- Roberto Rigobon
- Christian Upper
- Guiglielmo Maria Caporale
- Nicola Spagnolo
- rea cipollini
- Anna Pavlova
- Jeffrey A. Frankel
Citations in the corpus
- International comovements in inflation rates and country characteristics (2011, unknown): “Even in the absence of a de jure fixed exchange rate regime, a desire to stabilize exchanges rates can prompt central banks to mirror each other’s policy shifts (Canzoneri and Gray, 1985; Calvo and Reinhart, 2002; Devereux and Engel, 2007).”
- Currency Unions, Product Introductions, and the Real Exchange Rate* (2014, background): “Many papers have focused on the LOP deviations that emerge among traded goods due to movement in the NER in models with price stickiness, as in Devereux, Engel, and Storgaard (2004) and Devereux and Engel (2007).”