Real Aspects of Exchange Rate Regime Choice with Collapsing Fixed Rates

Abstract

Typical evaluations of the choice of exchange rate regime examine the performance or the real economy and assume that the regimes last indetinitely. In contrast, actual regimes are quite transitory. This paper examines how the predictions of two popular models for the determina-tion of some real economic variables must be modified when agents rationally perceive that a lixed rate regime will be transitory. The models studied are simple stochastic versions of the models in Dornbusch (1976) and Flood and Marion (1982). 1