The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production / Michael B. Devereux, Charles Engel.

Format:

Book

Author/Creator:

Devereux, Michael B.

Contributor:

National Bureau of Economic Research.

Engel, Charles.

Series:

Working Paper Series (National Bureau of Economic Research) no. w6992.

NBER working paper series no. w6992

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Other Title:

The Optimal Choice of Exchange-Rate Regime

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1999.

Summary:

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.

Notes:

Print version record

March 1999.