Working Paper: NBER ID: w0842
Authors: David A. Hsieh
Abstract: This paper examines the argument that the fixed exchange rate regime should be preferred to the flexible rate regime because the former allows risk sharing across countries while the latter does not. The analysis is performed in a two-country overlapping generations model, where markets are incomplete under either exchange regime. In this second best world, it is demonstrated that the ability to share risk across countries in the fixed rate regime does not necessarily lead to higher welfare than the inability to share risk in the flexible rate regime.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed exchange rate regime (F33) | risk sharing across countries (F65) |
| risk sharing across countries (F65) | welfare outcomes (I38) |
| fixed exchange rate regime (F33) | lower welfare outcomes (I38) |
| flexible exchange rate regime (F33) | higher welfare outcomes (I31) |
| risk aversion (D81) | preference for exchange rate regimes (F33) |
| fixed regime (P16) | increase mean consumption in one country (F62) |
| fixed regime (P16) | decrease mean consumption in another country (F69) |