| Abstract: | This paper develops a methodology for evaluating the short-run welfare implications of different exchange rate regimes. Heterogeneous, optimizing domestic consumers live for two periods, consume goods and leisure, supply labor, save home and foreign bonds, and demand currency. Firms maximize profits. The home government levies taxes, issues money and bonds and supplies public goods. The foreign country demands imports, supplies exports, and lends to the home country. The theoretical model is estimated for Australia. Counter-factual simulations are carried out. The results suggest that floating was, or would have been, the superior regime for the 1981–1984 period. |
