Optimal and time consistent exchange-rate management in an overlapping-generations economy

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Abstract

This paper analyzes exchange-rate management in a simple overlapping generations model. This framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage. When the chief concern is to provide a desirable store of value, a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate. The same is true when the government is concerned with maximizing total expected seigniorage, although more intervention is typically desirable when generating seigniorage is the major objective. When seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value, a national currency may not be viable in the absence of exchange controls. Such controls may be justified in this situation.

Original languageEnglish (US)
Pages (from-to)83-100
Number of pages18
JournalJournal of International Money and Finance
Volume4
Issue number1
DOIs
StatePublished - Mar 1985

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Overlapping generations
Seigniorage
Exchange rates
Currency
Authority
Monetary policy
Floating
Government
Overlapping generations model

All Science Journal Classification (ASJC) codes

  • Finance
  • Economics and Econometrics

Cite this

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abstract = "This paper analyzes exchange-rate management in a simple overlapping generations model. This framework is used to evaluate alternative policies in terms of their implications for the welfare of individuals in the economy and for generating seigniorage. When the chief concern is to provide a desirable store of value, a policy of fixing the exchange rate does better when shocks are primarily of domestic origin while floating becomes more desirable when foreign shocks predominate. The same is true when the government is concerned with maximizing total expected seigniorage, although more intervention is typically desirable when generating seigniorage is the major objective. When seigniorage concerns are paramount and when the monetary authority cannot establish a reputation for conducting monetary policy in a way that makes the currency a desirable store of value, a national currency may not be viable in the absence of exchange controls. Such controls may be justified in this situation.",
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