DP5797 On the Relevance of Exchange Rate Regimes for Stabilization Policy

Author(s): Bernardino Adão, Isabel Correia, Pedro Teles
Publication Date: August 2006
Keyword(s): fiscal and monetary policy, fixed exchange rates, labour mobility, monetary union, nominal rigidities, stabilization policy
JEL(s): E31, E63, F20, F33, F41, F42
Programme Areas: International Macroeconomics
Link to this Page: cepr.org/active/publications/discussion_papers/dp.php?dpno=5797

This paper assesses the relevance of the exchange rate regime for stabilization policy. This regime question cannot be dealt with independently of other institutions, in particular how fiscal policy is designed. We show that once fiscal policy is taken into account, the exchange rate regime is irrelevant. This is the case independently of the severity of price rigidities, independently of asymmetries across countries in shocks and transmission mechanisms and regardless of the incompleteness of international financial markets. The only relevant condition is labour mobility. The immobility of labour across countries is a necessary condition for our results.