Nominal Anchor Exchange Rate Policies as a Domestic Distortion
41 Pages Posted: 15 Jul 2000 Last revised: 24 Apr 2022
Date Written: March 1997
Abstract
This paper analyzes a nominal anchor exchange rate policy as a domestic distortion, in the tradition of international trade theory. It is shown that, in addition to the problems of sustainability and exit pinpointed in the exchange rate literature, a nominal anchor exchange rate policy, while in force, drives a wedge between the domestic and the international intertemporal marginal rates of substitution. The welfare cost of the Mexican use of the nominal anchor exchange rate policy prior to December 1994 is then estimated.
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