Purchasing power parity versus fixed exchange rate rules: a stability and welfare analysis

Authors

Jong Kook Shin
Chetan Subramanian

Document Type

Article

Publication Title

Manchester School

Abstract

This paper evaluates the desirability of PPP rules vis?á?vis fixed exchange rates both in terms of welfare and stability properties. The analysis is conducted within a small open?economy New Keynesian framework extended to include a cost channel. In terms of stability, we find that while the equilibrium is always unique under fixed exchange rates its uniqueness critically depends upon the presence/absence of the cost channel under a PPP rule. Overall, then, in terms of welfare a fixed exchange rate always outperforms a PPP rule.

DOI Link

https://doi.org/10.1111/J.1467-9957.2011.02244.X

Publication Date

1-4-2012

Publisher

Wiley

Volume

Vol.80

Issue

Iss.3

Recommended Citation

Shin, Jong Kook and Subramanian, Chetan, "Purchasing power parity versus fixed exchange rate rules: a stability and welfare analysis" (2012). Faculty Publications. 1636.
https://research.iimb.ac.in/fac_pubs/1636