A positive and normative evaluation of alternative monetary policy regimes is addressed
in a simple two-country general equilibrium model. The behavior of the exchange rate,
as well as of the other macroeconomic variables, depends crucially on the monetary
regime chosen, though not necessarily on monetary shocks. The centralized welfare
criterion presents a trade-off between stabilizing the economy around the flexible-price
allocation and reducing the volatility of the nominal interest rates. Some form of
control of the exchange rate is desirable.