Trade and Welfare Under Alternative Exchange Rate Regimes

Rajesh Singh ()

Staff General Research Papers Archive from Iowa State University, Department of Economics

Abstract: This paper compares the welfare under two standard alternative exchange rate regimes, fixed and flexible, in a stochastic dynamic general equilibrium two-country setting. Conventional wisdom holds that countries often prefer low exchange-rate variability to stabilize trade. This may explain the observed `fear of floating' in emerging markets -- although most of them claim to adopt a flexible system, in reality they often intervene to peg. We show that under incomplete capital markets a fixed exchange rate regime unambiguously increases trade and improves welfare. This provides a potential explanation for the observed exchange rate policies in emerging markets.

Keywords: optimal; exchange; rates (search for similar items in EconPapers)
JEL-codes: F30 F40 (search for similar items in EconPapers)
Date: 2004-02-26
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Persistent link: https://EconPapers.repec.org/RePEc:isu:genres:11463

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