TY - JOUR
TI - Expenditure Switching Vs. Real Exchange Rate Stabilization: Competing
Objectives for Exchange Rate Policy
T2 - NBER Working Papers
IS - 12215
KW - exchange rate policy
KW - exchange rate volatility
KW - optimal monetary policy
AB - This paper develops a view of exchange rate policy as a trade-off
between the desire to smooth fluctuations in real exchange rates so
as to reduce distortions in consumption allocations, and the need to
allow flexibility in the nominal exchange rate so as to facilitate
terms of trade adjustment. We show that optimal nominal exchange rate
volatility will reflect these competing objectivesThe key
determinants of how much the exchange rate should respond to shocks
will depend on the extent and source of price stickiness, the
elasticity of substitution between home and foreign goods, and the
amount of home bias in production. Quantitatively, we find the
optimal exchange rate volatility should be significantly less than
would be inferred based solely on terms of trade considerations.
Moreover, we find that the relationship between price stickiness and
optimal exchange rate volatility may be non-monotonic
AU - Devereux, Michael B.
AU - Engel, Charles M.
UR - http://ecsocman.hse.ru/text/19080466/
PY - 2006
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LA - EN
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