Exchange Rate Protection and Exchange Rate Conflict

Christopher Bliss and Vijay Joshi

Oxford Economic Papers, 1988, vol. 40, issue 2, 365-77

Abstract: This paper investigates a model of "exchange rate protection" with two countries, either or both of then seeking to protect their tradable sectors by maintaining undervalued exchange rates. The equilibrium that would result is demonstrated and shown to be inefficient, suggesting that, in principle, countries which seek to use the exchange rate as a protectionist device would gain by cooperation. A more general model is also considered in which countries may wish to antiprotect their tradable sectors by maintaining overvalued exchange rates. The models may throw light on recent episodes of undervaluation and overvaluation of major currencies. Copyright 1988 by Royal Economic Society.

Date: 1988
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