DP123 Monetary Policy Interactions under Managed Exchange Rates

Author(s): Francesco Giavazzi, Alberto Giovannini
Publication Date: August 1986
Keyword(s): Exchange Rates, Monetary Policy, Mundell-Fleming Model
JEL(s): 026, 311, 431, 432
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=123

This paper studies monetary policy games in a two-period Mundell-Fleming model, under a regime of managed exchange rates. A regime of managed exchange rates is defined as one where exchange rates are pegged but bilateral parities can be changed from time to time. The paper argues that such a regime is the most appropriate description of the Bretton Woods system and many arrangements currently in existence. We show that Cournot-Nash equilibria under managed rates differ significantly from those under fixed or floating rates. Under managed rates the world-wide efficiency losses from lack of coordination are not equally shared by all countries.