Working Paper: CEPR ID: DP123
Authors: Francesco Giavazzi; Alberto Giovannini
Abstract: This paper studies monetary policy games in a two-period Mundell-Fleming model, under a regime of managed exchange rates. A regime of managed exchange rates is defined as one where exchange rates are pegged but bilateral parities can be changed from time to time. The paper argues that such a regime is the most appropriate description of the Bretton Woods system and many arrangements currently in existence. We show that Cournot-Nash equilibria under managed rates differ significantly from those under fixed or floating rates. Under managed rates the world-wide efficiency losses from lack of coordination are not equally shared by all countries.
Keywords: international monetary policy; managed exchange rates; symmetric exchange rate regimes; bretton woods; european monetary system
JEL Codes: 311; 432
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Lack of coordination in managed exchange rate regimes (F33) | Efficiency losses (D61) |
| Demand shock (J23) | Home country worse off (O57) |
| Home country controlling exchange rate (F31) | Foreign country avoids overcontraction or overexpansion (F32) |
| Supply shock (Q31) | Home country controls domestic price levels (E64) |
| Home country managing exchange rate (F31) | Negative impact on foreign country (F69) |
| Managed exchange rate regime (F33) | Successful disinflation through exchange rate appreciation (F31) |