Relative price risk in an open economy with fixed and flexible exchange rates

Juergen von Hagen and Manfred Neumann

Open Economies Review, 1990, vol. 1, issue 3, 269-289

Abstract: We analyze the choice between fixed and flexible exchange rates in the context of an open economy version of a multimarkets equilibrium model. In contrast to previous analysis, we separate the information and the shock-absorbing aspects of the two regimes. Under a relative price risk criterion, flexible exchange rates are preferable for a relatively open economy, the more so the less stable are domestic output demand and supply conditions. Fixed exchange rates are preferable for a relatively closed economy, especially so if domestic output demand and supply functions are relatively stable, and if the real balance effect in domestic output demand functions is strong. Copyright Kluwer Academic Publishers 1990

Date: 1990
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DOI: 10.1007/BF01886159

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