Exchange rate policy and firm dynamics

Masashige Hamano and Francesco Pappadà

No 2018, Working Papers from Waseda University, Faculty of Political Science and Economics

Abstract: This paper examines the exchange rate policy in a two-country model with nom- inal wage rigidities and firm dynamics. We show that a exible exchange rate is unable to replicate the exible price allocation under incomplete financial markets. In our setting with heterogeneous firms, a monetary intervention dampens nominal exchange rate uctuations and stabilizes the firm selection in the export market. The reduction in wage setting uncertainty ensured by a fixed exchange rate is par- ticularly relevant when firms are small and homogeneous, thus providing a rationale for currency manipulation in exchange rate policies.

Keywords: exchange rate policy; firm heterogeneity; nominal rigidities (search for similar items in EconPapers)
JEL-codes: E40 F32 F41 (search for similar items in EconPapers)
Pages: 49 pages
Date: 2021-02
New Economics Papers: this item is included in nep-cba, nep-mac and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:wap:wpaper:2018

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