Template-Type: ReDIF-Paper 1.0
Author-Name: Paul Bergin
Author-Name-First: Paul
Author-Name-Last: Bergin
Author-Name: Hyung-Cheol Shin
Author-Name-First: Hyung-Cheol
Author-Name-Last: Shin
Author-Name: Ivan Tchakarov
Author-Name-First: Ivan
Author-Name-Last: Tchakarov
Author-Workplace-Name: Department of Economics, University of California Davis
Title: Does Exchange Rate Variability Matter for Welfare? A Quantitative Investigation of Stabilization Policies
Abstract: This paper evaluates quantitatively the potential welfare gains from monetary policy and fixedexchange rate rules in a two-country sticky-price model. The first finding is that the gains fromstabilization tend to be small in the types of economic environments emphasized in recenttheoretical literature. The analysis goes on to identify two types of economies in which thewelfare implications of risk are larger: where agents exhibit habits, and where international assetmarkets exhibit asymmetry in the form of ?original sin.? In the habits case, monetary policyaimed solely at inflation stabilization is optimal. But in the original sin case there are potentiallylarge welfare gains from also eliminating exchange rate volatility.
Length: 28
File-URL: https://repec.dss.ucdavis.edu/files/Wp9EabGj7rVzfTzLdUCAamrC/05-12.pdf
File-Format: application/pdf
Number: 265
Classification-JEL: F41
KeyWords: exchange rate risk, second order approximation
Creation-Date: 20050629
Handle: RePEc:cda:wpaper:265