انتخاب بین نرخ ارز ثابت و قابل انعطاف : کدامیک برای یک اقتصاد کوچک باز بهتر است؟

The optimal exchange rate regime choice for a small open economy is investigated in a stochastic general equilibrium model. Even if the home money supply fluctuates heavily, pegging the exchange rate to a country with a less volatile monetary policy may not be welfare improving if prices are sticky in producer's currency. Owing to a reduction in the risk premium incorporated in prices output and thus work effort may rise so much that the positive welfare effect of an increase in overall consumption is overcompensated. This effect is stronger the closer the substitutability between home and foreign goods and the larger the tradable sector is. The model further implies that the policymaker can almost always reap a welfare gain by choosing an exchange rate peg if prices are set in the consumer's currency.

The optimal choice of the exchange rate system is among the perennially debated issues in international economics. The main argument for floating was formulated by Friedman (1953) and Mundell (1961). Exchange rate flexibility leads to efficient outcomes in the presence of sticky prices since it brings about the adjustment of the real exchange rate if needed. In the face of country-specific productivity shocks that require adjustments in relative prices, flexible exchange rates are therefore desirable.1 An exchange rate peg for a small open economy is advocated traditionally with reference to its trade-increasing effects or to the import of credibility.2 Further arguments have been added to the debate recently in general equilibrium models of the New Keynesian type. Devereux and Engel (1998) were among the first to readdress the choice of the exchange rate system in these models. They point out that the optimal exchange rate regime critically depends on the degree to which exchange rate changes pass through to prices. Devereux and Engel argue that when there is full pass-through the optimal choice of exchange rate regime is not unambiguous. A freely floating exchange rate is associated with a lower consumption variance than a fixed rate, but exchange rate volatility imposes an additional welfare cost in terms of a lower average consumption level. An unambiguous result reappears when prices are set in local currency. Now, floating exchange rates always dominate fixed rates because home consumption is insulated from foreign policy shocks. In line with Friedman and Mundell, Devereux and Engel (2003) show in another paper that exchange rate flexibility is desirable in the face of real shocks if the law of one price holds. If, however, the ability of floating exchange rates to redirect aggregate demand is limited owing to prices that are (partly) unresponsive to exchange rate fluctuations, the benefit to exchange rate flexibility declines.3 This paper picks up the recent discussion about fixed versus floating exchange rates and investigates the optimal regime choice for a small open economy in a stochastic general equilibrium framework. The traditional arguments in favor of fixed and flexible exchange rates are at the core of the analysis: do flexible exchange rates do a better job of stabilizing the economy than fixed exchange rates? Is the import of monetary stability through an exchange rate peg from a regime that has manifested strong monetary discipline really beneficial? As opposed to the work of, e.g. Devereux and Engel (1998), Devereux (2004) and Senay and Sutherland (2004), we do not only consider the impact of foreign monetary uncertainty on the optimal regime choice but also explicitly take home monetary uncertainty into account. We further suppose that consumption goods are produced in two sectors, a tradable and a non-tradable goods sector. This set-up makes the optimal regime choice dependent on the stochastic characteristics of the home and foreign money supplies and on the relative size of the consumption goods sectors. Two further aspects of the model are noteworthy. To allow for a variation in the strength of the expenditure switching effect, the elasticity of substitution between home and foreign tradables is not restricted to unity, as in many recent papers on the optimal regime choice (such as the papers by Devereux (2004) and Devereux and Engel, 1998, Devereux and Engel, 2003 and Devereux and Engel, 2004).4 Furthermore, an asymmetry is introduced into the model. Empirical studies show that the pass-through is typically larger in countries with a larger import share (see Campa and Gonzalez-Minguez (2004) and McCarthy (1999)). It is therefore supposed that the degree of pass-through in the small open economy is complete while it may be either equal to one or equal to zero in the economically large foreign country.5 In the first case, prices of home goods in the foreign country respond one to one to exchange rate movements. This is equivalent to assuming that prices are set in the currency of the producer (producer currency pricing, PCP). In the latter case, home firms set their export prices in local currencies (local price setting, LCP). Now, the local price of a good, i.e. the price in the currency of the consumer, is completely insulated from exchange rate changes. The model points to some novel aspects concerning the stabilization properties of fixed and floating exchange rates and the optimal regime choice. Even if the home money supply fluctuates heavily, pegging the exchange rate to a country with a less volatile monetary policy may not be welfare improving if prices are set according to the PCP hypothesis. The overall consumption level may be higher in a fixed exchange rate regime because the risk premium incorporated in prices falls (as argued by Devereux and Engel (1998)). But a reduced risk premium not only has positive welfare effects. Work effort may increase so much under an exchange rate peg that a flexible exchange rate turns out to be the welfare superior policy option. Against intuition, fixing may therefore not be worthwhile when the foreign country pursues a more stable monetary policy. This effect is stronger the closer the substitutability between home and foreign goods is, and the larger the tradable sector is. In sharp contrast to Sutherland (2004) and Senay and Sutherland (2004) we can hence conclude that a strong expenditure switching effect (based on a high substitutability between home and foreign goods) favors a floating exchange rate over an exchange rate peg. The model further implies that an exchange rate peg is almost always the optimal policy option if prices are set according to the LCP hypothesis. The remainder of the paper is structured as follows. The model is developed in the next section. Section 3 discusses the average level of consumption and the level and volatility of work effort under fixed and flexible exchange rates. In Section 4, the welfare results are derived and compared. Section 5 concludes.

The debate on fixed versus flexible exchange rates is a long-standing topic in international economics. In this paper, we explore the effect of monetary uncertainty in the home and the foreign country on the optimal regime choice for a small open economy in a stochastic general equilibrium framework. Elements of the model that are keys to the welfare results of the alternative exchange rate regimes are the sectoral structure of the economies and the degree of pass-through in the foreign country. Even if the home money supply fluctuates heavily, importing a more stable monetary policy through a fixed exchange rate may not be welfare superior if prices are sticky in the producer's currency. Overall consumption may rise if the economy switches from exchange rate flexibility to an exchange rate peg. But owing to a reduction in the risk premium incorporated in prices, work effort may increase so much that a flexible exchange rate turns out to be the welfare superior policy option. A flexible exchange rate is particularly beneficial if home and foreign goods are close substitutes and the tradable sector is comparatively large because then, work effort turns out to be lowest. Against intuition, fixing may therefore not be worthwhile when the foreign country pursues a more stable monetary policy. In an environment where the exchange rate has only a limited or no impact on demand, some of these linkages are cut off. Therefore, a country can almost always reap a welfare gain by switching from exchange rate flexibility to an exchange rate peg if prices are sticky in the consumer's currency. Of course, the model in this paper is simplified in a number of respects and ignores many aspects that may be worth integrating in the analysis. Credibility problems of fixed exchange rate regimes are abstracted from. In addition, the only shocks considered are policy shocks. Moreover, the analysis could be refined by analyzing the welfare performance of simple policy rules.