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Does Exchange Rate Risk Matter for Welfare?

Paul Bergin and Ivan Tchakarov

No 9900, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: Volatility in exchange rates is a prominent feature of open economies, a fact which has motivated elaborate attempts in many countries at exchange rate management. This paper analyzes quantitatively the welfare effects of exchange rate risk in a general two-country environment. It finds that the effects of uncertainty tend to be small for the types of simplified cases considered in past literature. But it identifies other cases, not considered previously, in which these effects can be significantly larger. These include habit persistence, where agents are more sensitive to risk, and also incomplete asset market structures which allow for asymmetries between countries. The latter case suggests that countries which are hosts to an international reserve currency, such as the U.S. or members of the euro zone, may accrue

JEL-codes: F41 O31 B31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn and nep-rmg
Date: 2003-08
Note: CF CF CF IFM
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