TY  - JOUR
AU  - Bacchetta,Philippe
AU  - Wincoop,Eric Van
TI  - Does Exchange Rate Stability Increase Trade and Capital Flows?
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 6704
PY  - 1998
Y2  - August 1998
UR  - http://www.nber.org/papers/w6704
L1  - http://www.nber.org/papers/w6704.pdf
N1  - Author contact info:
Philippe Bacchetta
Faculty of Business and Economics
University of Lausanne
Extranef
CH-1015 Lausanne
Switzerland
E-Mail: philippe.bacchetta@unil.ch

Eric van Wincoop
Department of Economics
University of Virginia
P.O. Box 400182
Charlottesville, VA  22904-4182
Tel: 434/924-3997
Fax: 434/982-2904
E-Mail: vanwincoop@virginia.edu
AB  - On the eve of a major change in the world monetary system, the adoption of a single currency in Europe, our theoretical understanding of the implications of the exchange rate regime for trade and capital flows is still limited.  We argue that two key model ingredients are essential to address this question: a general equilibrium setup and deviations from purchasing power parity.  By developing a simple benchmark monetary model that contains these two ingredients, we find the following main results.  First, the level of trade is not necessarily higher under a fixed exchange rate regime.  Second, the level of net capital flows tends to be higher under a fixed exchange rate regime when there is a preference for domestic bonds, which is the case when the rate of relative risk-aversion is larger than one.  Third, the asset market structure, including the presence of a forward market, does not quantitatively affect the results.
ER  -