On the relevance of exchange rate regimes for stabilization policy

Bernardino Adao, Isabel Correia and Pedro Teles ()

Journal of Economic Theory, 2009, vol. 144, issue 4, pages 1468-1488

Abstract: This paper assesses the relevance of the exchange rate regime for stabilization policy. Using both fiscal and monetary policy, we conclude that the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms. The only relevant conditions are on the mobility of labor and financial assets. The results can be summarized with the claim that every currency area is an optimal currency area. However, with labor mobility or tradable state-contingent assets, additional policy instruments would be required to establish the irrelevance result.

Keywords: Optimal; currency; areas; Monetary; union; Fixed; exchange; rates; Fiscal; and; monetary; policy; Stabilization; policy; Labor; mobility; Nominal; rigidities (search for similar items in EconPapers)
Date: 2009

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Related works:
Working Paper: On the Relevance of Exchange Rate Regimes for Stabilization Policy (2006)
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Persistent link: http://EconPapers.repec.org/RePEc:eee:jetheo:v:144:y:2009:i:4:p:1468-1488

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