A classic argument for flexible exchange rates is that the exchange rate plays a 'shock-absorber' role in an open economy vulnerable to country-specific shocks. This paper presents a sharp counter-example to this argument within a very conventional open economy model. Countries are subject to...

This paper studies how the monetary policy regime affects the relative importance of nominal exchange rates and inflation rates in shaping the response of real exchange rates to shocks. We document two facts about countries with floating exchange rates where monetary policy controls inflation...