Monetary policy in the open economy revisited: The case for exchange-rate flexibility restored
This paper revisits the sticky-price pricing-to-market model of Devereux and Engel [Devereux, M.B., Engel, C., 2003. Monetary policy in the open economy revisited: price setting and exchange-rate flexibility. Review of Economic Studies 70(4), 765-783], in which fixed exchange rates are optimal even in the face of country-specific nonmonetary shocks. We show that this result hinges critically on the Devereux-Engel model's prediction that international consumption levels are perfectly synchronized under flexible prices. Realistic modifications of the model that produce nonsynchronous consumption movements - such as, the presence of nontraded goods - upset the fixed exchange rate prescription even in the absence of an expenditure-switching role of exchange rate changes.
Year of publication: |
2008
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Authors: | Duarte, Margarida ; Obstfeld, Maurice |
Published in: |
Journal of International Money and Finance. - Elsevier, ISSN 0261-5606. - Vol. 27.2008, 6, p. 949-957
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Publisher: |
Elsevier |
Saved in:
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