International Risk Sharing and the Choice of Exchange-Rate Regime

David A. Hsieh

No 842, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper examines the argument that the fixed exchange rate regime should be preferred to the flexible rate regime because the former allows risk sharing across countries while the latter does not. The analysis is performed in a two-country overlapping generations model, where markets are incomplete under either exchange regime. In this second best world, it is demonstrated that the ability to share risk across countries in the fixed rate regime does not necessarily lead to higher welfare than the inability to share risk in the flexible rate regime.

Date: 1982-01
Note: ITI IFM
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Published as Journal of International Money and Finance, Vol. 3, no. 2 (1984): 141-151.

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