The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production

Michael Devereux and Charles Engel

No 6992, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: We investigate the choice of exchange-rate regime fixed or floating in a dynamic, intertemporal general equilibrium framework. Our framework extends Devereux and Engel (1998) by investigating the implications of internationalized production. We examine the role of price-setting -- whether prices are set in the currency of producers or the currency of consumers in determining the optimality of exchange-rate regimes in an environment of uncertainty created by monetary shocks. We find that when prices are set in producers' currencies, floating exchange rates are preferred when the country is large enough, or not too risk averse. On the other hand, floating exchange rates are always preferred when prices are set in consumers' currencies because floating exchange rates allow domestic consumption to be insulated from foreign monetary shocks. The gains from floating exchange rates are greater when there is internationalized production in this case.

JEL-codes: F20 F40 (search for similar items in EconPapers)
Date: 1999-03
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (31)

Published as Blomstrom, Magnus and Linda Goldberg (eds.) Topics in Empirical International Economics: Festschrift in Honor of Robert Lipsey. Chicago: University of Chicago Press and NBER, 2001.
Published as The Optimal Choice of Exchange Rate Regime: Price-Setting Rules and Internationalized Production , Michael B. Devereux, Charles Engel. in Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey , Blomstrom and Goldberg. 2001

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Chapter: The Optimal Choice of Exchange Rate Regime: Price-Setting Rules and Internationalized Production (2001)
Working Paper: The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production (2000)
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