@techreport{Mundaca2004risk,
abstract = {We derive the optimal exchange rate policy for a small open economy subject to terms-oftrade
shocks. Firm 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 less risk-averse firms,
and greater difference in risk aversion between workers and firms, 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 firms
behave monopolistically and when wage taxes (profit taxes) change procyclically
(countercyclically) with export prices (import prices). The model gives policy rules for
determining optimal variations of the exchange rate, and indicates when it is, and is not,
optimal to join a currency union with trading partners, implying zero exchange rate variation.},
author = {B. Gabriela Mundaca and Jon Strand},
copyright = {http://www.econstor.eu/dspace/Nutzungsbedingungen},
keywords = {F41; F33; F31; 330; currency band; monetary union; price volatility; optimal risk allocation; Wechselkurspolitik; Target Zone; Risiko; Allokation; Risikoaversion; Preisniveaustabilit\"{a}t; W\"{a}hrungsunion; Theorie},
language = {eng},
number = {1361},
title = {A risk allocation approach to optimal exchange rate policy},
type = {CESifo working papers},
url = {http://hdl.handle.net/10419/18724},
year = {2004}
}
