Pricing-to-Market, the Interest-Rate Rule, and the Exchange Rate
20 Pages Posted: 20 Nov 2006 Last revised: 14 Sep 2010
Date Written: November 2006
Even when the exchange-rate plays no expenditure-switching role, countries may wish to have flexible exchange rates in order to free the domestic interest rate as a stabilization tool. In a setting with nontraded goods, exchange-rate movements may also enhance international risk sharing.
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