Staff Report 194

Fixed vs. Floating Exchange Rates: A Dynamic General Equilibrium Analysis

Daniel M. Chin
Preston J. Miller Former Vice President and Monetary Adviser

Published July 1, 1995

In this study we contrast fixed and floating exchange rate regimes in a dynamic general equilibrium model. We find that the fundamental difference in the regimes is in the courses they imply for monetary policies. Because of policy coordination requirements, a tighter monetary policy needed to maintain a fixed exchange rate may necessitate a tightening in budget policy as well. We show that under some initial conditions voters or a social planner will favor one regime, but under other conditions they will favor the other. However, the choices of voters and a social planner are almost diametrically opposed.

Published In: European Economic Review (Vol 42, No. 7, 1998, pp. 1221-1249)

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