International risk sharing and the choice of exchange-rate regime

Published

Journal Article

This paper examines the argument that the fixed exchange-rate regime should be preferred to the flexible rate regime because the former allows risk sharing across countries while the latter does not. The analysis is performed in a two-country overlapping generations model, where markets are incomplete under all exchange regimes. It is shown that risks are pooled across countries when the equilibrium exchange rate is constant across states of nature, which arises under the fixed rate regime with or without capital restriction, and under the flexible rate regime without capital restriction. Risks are not pooled across countries when the equilibrium exchange rate is different across states of nature, which arises under the flexible rate regime with capital restriction. But in a model with incomplete markets, the ability to share risk across countries in the regimes with constant exchange rates does not necessarily lead to higher welfare than the inability to share risk in the regime with random exchange rates. © 1984.

Full Text

Duke Authors

Cited Authors

  • Hsieh, DA

Published Date

  • January 1, 1984

Published In

Volume / Issue

  • 3 / 2

Start / End Page

  • 141 - 151

International Standard Serial Number (ISSN)

  • 0261-5606

Digital Object Identifier (DOI)

  • 10.1016/0261-5606(84)90002-0

Citation Source

  • Scopus