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
Tech Report Number
1995-002
Date of this Version
1995
Recommended Citation
Carlson, John A. and Han, Dong-Geun, "Monetary Coordination, Fixed Exchange Rates and Noisy Markets" (1995). Purdue CIBER Working Papers. Paper 101.
https://docs.lib.purdue.edu/ciberwp/101