Tech Report Number
1995-002
Abstract
With common global shocks, a leader-follower fixed-exchange-rate regime improves on a non-cooperative flexible-rate regime when the spillover effects from each country;s money supply to the other country's output are symmetric. However, small exchange market shocks, from random capital flows, may undermine the incentives for either country to be the follower. Furthermore, a regime in which exchange rates are fixed when transitory exchange-market shocks are small and flexible with larger shock always dominates a flexible-rate regime, in marked contrast to (credible) target-zone models that call for pegged rates only at upper or lower bounds in response to large shocks.
Keywords
Exchange Rate, International Finance
Date of this Version
1995
COinS