Price Rigidity and the Selection of the Exchange Rate Regime |
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Authors: | Fabrice Collard Harris Dellas |
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Institution: | (1) GREMAQ-CNRS, Manufacture des Tabacs, bat F., 21 allée de Brienne, Toulouse, 31000, France;(2) Department of Economics, University of Bern, CEPR and IMOP, Gesellschaftsstrasse 49, Bern, CH-3012, Switzerland |
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Abstract: | We evaluate and qualify Friedman's, 1953, “case for flexible exchange rates” in the presence of sticky prices in a two country
model. We find that a flexible regime performs indeed better when the degree of nominal price rigidity is high while a bilateral
peg does better when prices are fairly flexible. This result obtains independent of whether monetary policy is activistic
or not and is mostly due to the negative relationship between employment and productivity shocks when prices are relatively
sluggish (Gali, 1999). A unilateral peg tends to produce the lowest level of world welfare but it sometimes represents the
best monetary arrangement for the pegger.
JEL Classification Numbers: E32, E52, F33, F42 |
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Keywords: | exchange rate systems monetary policy price sluggishness inflation targeting |
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