search query: @author Mundaca, B.G. / total: 1
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| Author: | Mundaca, B.G. Strand, J. |
| Title: | A risk allocation approach to optimal exchange rate policy |
| Journal: | Oxford Economic Papers
2005 : JUL. VOL, 57:3, p. 398-421 |
| Index terms: | Allocation Exchange rates Risk |
| Language: | eng |
| Abstract: | This study derives the optimal exchange rate policy for a small open economy subject to terms-of-trade shocks. Company owners and workers are risk averse but workers more so. Wages are given or partially indexed in the short run, and capital markets are imperfect. The government sets the exchange rate to allocate risk between workers and owners. With the less risk-averse companies, and greater difference in risk aversion between workers and companies, the optimal exchange rate should vary little with pure terms-of-trade shocks but more with general shocks to prices. Optimal exchange rate variation is greater with indexed wages, but is smaller when companies behave monopolistically and when wage taxes (profit taxes) change procyclically (counter-cyclically) with export prices (import prices). |
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