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Fixed vs. floating exchange rates: a dynamic general equilibrium analysis

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  • Daniel M. Chin
  • Preston J. Miller

Abstract

In this study we contrast fixed and floating exchange rate regimes in a dynamic general equilibrium model. We find that the fundamental difference in the regimes is in the courses they imply for monetary policies. Because of policy coordination requirements, a tighter monetary policy needed to maintain a fixed exchange rate may necessitate a tightening in budget policy as well. We show that under some initial conditions voters or a social planner will favor one regime, but under other conditions they will favor the other. However, the choices of voters and a social planner are almost diametrically opposed.

Suggested Citation

  • Daniel M. Chin & Preston J. Miller, 1995. "Fixed vs. floating exchange rates: a dynamic general equilibrium analysis," Staff Report 194, Federal Reserve Bank of Minneapolis.
    • Handle: RePEc:fip:fedmsr:194
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    References listed on IDEAS

    as
    1. Thomas J. Sargent & Neil Wallace, 1984. "Some Unpleasant Monetarist Arithmetic," Palgrave Macmillan Books, in: Brian Griffiths & Geoffrey E. Wood (ed.), Monetarism in the United Kingdom, pages 15-41, Palgrave Macmillan.
    2. Preston J. Miller & Richard M. Todd, 1992. "Real effects of monetary policy in a world economy," Staff Report 154, Federal Reserve Bank of Minneapolis.
    3. Preston J. Miller & Neil Wallace, 1985. "International coordination of macroeconomic policies: a welfare analysis," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 9(Spr).
    4. Rebelo, Sérgio, 1997. "What Happens When Countries Peg Their Exchange Rates? (The Real Side of Monetary Reforms)," CEPR Discussion Papers 1692, C.E.P.R. Discussion Papers.
    5. Michael J. Stutzer, 1985. "The statewide economic impact of small-issue industrial revenue bonds," Quarterly Review, Federal Reserve Bank of Minneapolis, vol. 9(Spr).
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    Cited by:

    1. Kollmann, R., 1996. "The Exchange rate in a Dynamic-Optimizing Current Account Model with Nominal Rigidities : A Quantitative Investigation," Other publications TiSEM c9241581-7b87-4f50-ab98-a, Tilburg University, School of Economics and Management.

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    Keywords

    Foreign exchange rates;

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