Does Exchange Rate Stability Increase Trade and Capital Flows?

Philippe Bacchetta and Eric van Wincoop

No 98.04, Working Papers from Swiss National Bank, Study Center Gerzensee

Abstract: On the eve of a major change in the world monetary system, the adoption of a single currency in Europe, our theoretical understanding of the implications of the exchange rate regime for trade and capital flows is still limited. We argue that two key model ingredients are essential to address this question: a general equilibrium setup and deviations from purchasing power parity. By developing a simple benchmark monetary model that contains these two ingredients, we find the following main results. First, the level of trade is not necessarily higher under a fixed exchange rate regime. Second, the level of net capital flows tends to be higher under a fixed exchange rate regime when there is a preference for domestic bonds, which is the case when the rate of relative risk-aversion is larger than one. Third, the asset market structure, including the presence of a forward market, does not qualitatively affect the results.

JEL-codes: F31 F33 F41 (search for similar items in EconPapers)
Pages: 42 pages
Date: 1998-07
References: Add references at CitEc
Citations: View citations in EconPapers (75)

Downloads: (external link)
http://www.szgerzensee.ch/fileadmin/Dateien_Anwend ... g_papers/wp-9804.pdf Full text (application/pdf)
None

Related works:
Working Paper: Does Exchange Rate Stability Increase Trade and Capital Flows? (1998)
Working Paper: Does exchange rate stability increase trade and capital flows? (1998)
Working Paper: Does Exchange Rate Stability Increase Trade and Capital Flows? (1998)
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:szg:worpap:9804

Ordering information: This working paper can be ordered from
Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee

The price is Free.

Access Statistics for this paper

More papers in Working Papers from Swiss National Bank, Study Center Gerzensee Studienzentrum Gerzensee, Postfach 21, 3115 Gerzensee.
Bibliographic data for series maintained by library ().