This essay is based on the 1997-98 Frank D. Graham Memorial Lecture, which I had the honor of presenting at Princeton University on April 9, 1998. Frank Graham was deeply concerned with the interplay among national policy sovereignty, exchange-rate regimes, and price-level stability. Today, the...

This paper develops an explicitly stochastic "new open economy macroeconomics" model, which can potentially by used to explore the qualitative and quantitative welfare differences between alternative exchange rate regimes.