Segmented Asset Markets and Optimal Exchange Rate Regimes

32 Pages Posted: 27 Jun 2007 Last revised: 30 Jul 2007

See all articles by Amartya Lahiri

Amartya Lahiri

University of British Columbia (UBC) - Department of Economics

Rajesh Singh

Iowa State University

Carlos A. Vegh

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS); University of Maryland - Department of Economics; University of California at Los Angeles; National Bureau of Economic Research (NBER)

Date Written: June 2007

Abstract

This paper revisits the issue of the optimal exchange rate regime in a flexible price environment. The key innovation is that we analyze this question in the context of environments where only a fraction of agents participate in asset market transactions (i.e., asset markets are segmented). Under this friction, alternative exchange rate regimes have different implications for real allocations in the economy. In particular -- and contrary to standard results under sticky prices -- we show that flexible exchange rates are optimal under monetary shocks and fixed exchange rates are optimal under real shocks.

Suggested Citation

Lahiri, Amartya and Singh, Rajesh and Vegh, Carlos A., Segmented Asset Markets and Optimal Exchange Rate Regimes (June 2007). NBER Working Paper No. w13154, Available at SSRN: https://ssrn.com/abstract=992157

Amartya Lahiri

University of British Columbia (UBC) - Department of Economics ( email )

997-1873 East Mall
Vancouver, BC V6T 1Z1
Canada
604.822.8606 (Phone)

HOME PAGE: http://www.econ.ubc.ca/alahiri/

Rajesh Singh

Iowa State University ( email )

613 Wallace Road
Ames, IA 50011
United States

Carlos A. Vegh (Contact Author)

Johns Hopkins University - Paul H. Nitze School of Advanced International Studies (SAIS) ( email )

1740 Massachusetts Avenue, NW
Washington, DC 20036-1984
United States

University of Maryland - Department of Economics ( email )

College Park, MD 20742
United States

University of California at Los Angeles ( email )

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310-825-9528 (Fax)

HOME PAGE: http://vegh.sscnet.ucla.edu

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