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On the Relevance of Exchange Rate Regimes for Stabilization Policy
2006
Authors
Publication Year
2006
JEL Code
E31 - Price Level; Inflation; Deflation
E63 - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization
F20 - General
F33 - International Monetary Arrangements and Institutions
F41 - Open Economy Macroeconomics
F42 - International Policy Coordination and Transmission
Abstract
This paper assesses the relevance of the exchange rate regime for stabilization policy. This regime question cannot be dealt with independently of other institutions, in particular how .fiscal policy is designed. We show that once .fiscal policy is taken into account, the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms and regardless of the incompleteness of international .financial markets. The only relevant condition is labor mobility. The imobility of labor across countries is a necessary condition for our results.
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On the Relevance of Exchange Rate Regimes for Stabilization Policy