Assessing the Welfare Cost of a Fixed Exchange-Rate Policy

Niels Dam () and Jesper Gregers Linaa

No 05-04, EPRU Working Paper Series from Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics

Abstract: This paper performs a welfare analysis based on the hypothetical scenario that Denmark gave up its peg and started conducting monetary policy according to a Taylor rule. For this we rely on a dynamic stochastic general equilibrium model for a small open economy that was estimated on Danish data using Bayesian methods. We obtain the result that the gain in welfare is equivalent to a permanent increase of around 0.8 pct in the level of consumption. Examining a range of alternative scenarios does not change this conclusion, unless we assume a degree of policy errors under the Taylor rule that is substantially larger than those estimated by other studies.

Keywords: open economy; monetary policy; business cycles; welfare (search for similar items in EconPapers)
JEL-codes: E3 E4 E5 F4 (search for similar items in EconPapers)
Pages: 32 pages
Date: 2005-06
New Economics Papers: this item is included in nep-mac
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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