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Price Stability and the Case for Flexible Exchange Rates

Cuche-Curti, Nicolas ; Dellas, Harris ; Natal, Jean-Marc

In: Open Economies Review, 2010, vol. 21, no. 1, p. 3-16

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    Title
    • Price Stability and the Case for Flexible Exchange Rates
    Author
    • Cuche-Curti, Nicolas. Swiss National Bank, SNB, P.O. Box, 8022, Zurich, Switzerland
    • Dellas, Harris. Department of Economics, University of Bern, Schanzeneckstr. 1, 3012, Bern, Switzerland
    • Natal, Jean-Marc. Swiss National Bank, SNB, P.O. Box, 8022, Zurich, Switzerland
    Document Type
    • Postprint
    Language
    • English
    Published in
    • Open Economies Review, 2010, vol. 21, no. 1, p. 3-16. Springer US; http://www.springer-ny.com
    Other Version
    OAI-PMH Identifier
    • oai:doc.rero.ch:319392
    Summary
    We revisit Friedman's case for flexible exchange rates in a small open economy with several distortions and rigidities and a variety of domestic and external shocks. We find that, for external shocks, the flexible exchange rate regime outperforms the fixed regime independent of the source of domestic nominal rigidities provided that the monetary authorities pursue a policy of strict inflation targeting. For domestic supply shocks, a joint policy of a flexible exchange rate and strict inflation targeting fares well when the main source of nominal rigidities is in the domestic goods markets, but not if rigidities arise in the labor markets