The Benefit of Exchange Rate Flexibility, Trade Openness and Extensive Margin

Kanda Naknoi

Purdue University Economics Working Papers from Purdue University, Department of Economics

Abstract: The literature on optimum currency areas argues that in the presence of countryspecific real shocks, the cost of fixing exchange rates is decreasing in the degree of trade openness. This study uses a stochastic dynamic general equilibrium model of endogenous specialization to assess the benefit of exchange rate flexibility. The benefit of exchange rate flexibility consists of the benefit along the extensive margin through adjustment in the composition of trade, and the benefit along the intensive margin through adjustment in the relative prices. Openness is found to influence these two benefits differently. Thus, the model predicts a non-monotonic relationship between openness and the benefit of exchange rate flexibility.

Keywords: Exchange rate regimes; Trade costs; Openness (search for similar items in EconPapers)
JEL-codes: F41 F42 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2008-11
New Economics Papers: this item is included in nep-cba, nep-dge, nep-ifn and nep-opm
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
https://business.purdue.edu/research/Working-papers-series/2008/1215.pdf (application/pdf)

Related works:
Working Paper: The Benefit of Exchange Rate Flexibility, Trade Openness and the Extensive Margin (2011)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:pur:prukra:1215

Access Statistics for this paper

More papers in Purdue University Economics Working Papers from Purdue University, Department of Economics Contact information at EDIRC.
Bibliographic data for series maintained by Business PHD ().