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Segmented asset markets and optimal exchange rate regimes

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  • Lahiri, Amartya
  • Singh, Rajesh
  • Vegh, Carlos

Abstract

This paper revisits the issue of the optimal exchange rate regime in a flexible price environment. The key innovation is that we analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). Under this friction, alternative exchange rate regimes have different implications for real allocations in the economy. In particular -- and contrary to standard results under sticky prices -- we show that flexible exchange rates are optimal under monetary shocks and fixed exchange rates are optimal under real shocks.
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Suggested Citation

  • Lahiri, Amartya & Singh, Rajesh & Vegh, Carlos, 2007. "Segmented asset markets and optimal exchange rate regimes," Journal of International Economics, Elsevier, vol. 72(1), pages 1-21, May.
    • Handle: RePEc:eee:inecon:v:72:y:2007:i:1:p:1-21
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    More about this item

    JEL classification:

    • F3 - International Economics - - International Finance
    • F40 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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