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Does Exchange Rate Stability Increase Trade and Capital Flows?, Research Paper 9818

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Does Exchange Rate Stability Increase Trade and Capital Flows?, Research Paper 9818

DATE: July 1998

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ABSTRACT: On the eve of a major change in the world monetary system, the adoption of a single currency in Europe, our theoretical understanding of the implications of the exchange rate regime for trade and capital flows is still limited. We argue that two key model ingredients are essential to address this question: a general equilibrium setup and deviations from purchasing power parity. By developing a simple benchmark monetary model that contains these two ingredients, we find the following main results. First, the level of trade is not necessarily higher under a fixed exchange rate regime. Second, the level of net capital flows tends to be higher under a fixed exchange rate regime when there is a preference for domestic bonds, which is the case when the rate of relative risk-aversion is larger than one. Third, the asset market structure, including the presence of a forward market, does not qualitatively affect the results.

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Bacchetta, Philippe and Van Wincoop, Eric. "Does Exchange Rate Stability Increase Trade and Capital Flows?, Research Paper 9818," Research Papers (Federal Reserve Bank of New York) (July 1998). https://fraser.stlouisfed.org/title/6570/item/615608, accessed on March 25, 2023.

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SUBJECTS:

THEMES: CLASSIFICATION:
  • jel: F31
  • jel: F33
  • jel: F41
  • lcc: HG136 .R45 no.9818
IDENTIFIERS:
  • oclc: 39874335
  • repec: fip:fednrp:9818
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