Does Exchange Rate Risk Matter for Welfare?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. |
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Page 1
... Devereux and Engel ( 2000 ) , and Bacchetta and Van Wincoop ( 2000 ) .2 - While offering tantalizing theoretical results , this literature has been limited to examining only the simplest of economic settings , as numerous simplifying ...
... Devereux and Engel ( 2000 ) , and Bacchetta and Van Wincoop ( 2000 ) .2 - While offering tantalizing theoretical results , this literature has been limited to examining only the simplest of economic settings , as numerous simplifying ...
Page 9
... Devereux and Engel ( 2000 ) , and Bacchetta and Van Wincoop ( 2000 ) ) , we follow them in using a money growth rule : mt = mt - 1 + as ( st - 3 ) ( 28 ) where lower case letters represent logs of upper case counterparts . This rule ...
... Devereux and Engel ( 2000 ) , and Bacchetta and Van Wincoop ( 2000 ) ) , we follow them in using a money growth rule : mt = mt - 1 + as ( st - 3 ) ( 28 ) where lower case letters represent logs of upper case counterparts . This rule ...
Page 17
... Devereux and Engel ( 2001 ) have demonstrated in an analytically solvable model that this distinction can alter the welfare effects of flexible exchange rates . Line 2 of Table 1 explores this variation on the benchmark model . This ...
... Devereux and Engel ( 2001 ) have demonstrated in an analytically solvable model that this distinction can alter the welfare effects of flexible exchange rates . Line 2 of Table 1 explores this variation on the benchmark model . This ...
Common terms and phrases
ACB,t Asymmetric Asset Market Bacchetta benchmark model Benigno BH,t bond calibrated changes compute consumption and leisure cov(St deterministic steady Devereux and Engel difference between stochastic effects of exchange effects of risk equilibrium equity premium puzzle Euler equation exchange rate regime exchange rate risk exchange rate variability FH,t firms fixed exchange rate flexible exchange rate foreign country foreign currency forward contracts habit persistence hedge against exchange home and foreign home country households implies interest rate interest rate parity investment Kollmann Kt+1 large welfare effects literature Macroeconomics markup monetary policy monetary shocks money demand shocks Nash equilibrium NBER Working Papers Number Author(s Obstfeld and Rogoff open economy parameter percent of steady PH,t PHtYt price setting price stickiness quantitatively reserve currency result risk aversion Standard deviations steady state consumption sticky price stochastic steady technology shocks trade volume u-mean U.S. dollar unit root utility function variance welfare costs Wincoop