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

Jong Kook Shin, Chetan Subramanian

Research output: Contribution to journalArticlepeer-review

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.
Original languageEnglish
Pages (from-to)321-354
Number of pages34
JournalManchester School
Volume80
Issue number3
DOIs
Publication statusPublished - Jun 2012

ASJC Scopus subject areas

  • Economics and Econometrics

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