Title: How valuable is exchange rate flexibilty?
Description: "The paper explores the optimal monetary policy reaction to productivity shocks in an open economy.  Whereas earlier studies assume that countries specialize in producing particular goods, I enrich the analysis by allowing for incomplete specialization.  I confirm the finding of Obstfeld and Rogoff (2000)--who build on Friedman (1953)--that a flexible exchange rate is highly valuable in delivering the optimal response to country- specific shocks.  Its value is, however, much smaller when shocks are sector-specific, because exchange rate fluctuations then lead to misallocations between different firms within a sector.  The limitation on the value of flexibility is sizable even when specialization is high"--Federal Reserve Bank of New York web site.
Subjects: Foreign exchange rates, Industrial productivity