Working Paper: NBER ID: w9900
Authors: Paul R. Bergin; Ivan Tchakarov
Abstract: Volatility in exchange rates is a prominent feature of open economies, a fact which has motivated elaborate attempts in many countries at exchange rate management. This paper analyzes quantitatively the welfare effects of exchange rate risk in a general two-country environment. It finds that the effects of uncertainty tend to be small for the types of simplified cases considered in past literature. But it identifies other cases, not considered previously, in which these effects can be significantly larger. These include habit persistence, where agents are more sensitive to risk, and also incomplete asset market structures which allow for asymmetries between countries. The latter case suggests that countries which are hosts to an international reserve currency, such as the U.S. or members of the euro zone, may accrue
Keywords: No keywords provided
JEL Codes: F41
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| exchange rate variability (F31) | household utility (D11) |
| habit persistence (D11) | sensitivity to exchange rate fluctuations (F31) |
| sensitivity to exchange rate fluctuations (F31) | welfare implications (I30) |
| international reserve currency status (F33) | welfare (I38) |
| optimized stabilization policy (E63) | utility gains (L97) |
| original sin (Y60) | utility gains from stabilization policies (E63) |