{
  "title": "Optimal and Sustainable Exchange Rate Regimes: A Simple Game-Theoretic Approach",
  "publication": "IMF Working Papers, November 1, 1992",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/optimal-and-sustainable-exchange-rate-regimes-a-simple-game-theoretic-approach-850",
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  "summary": "This paper examines the question of how to design an optimal and sustainable exchange rate regime in a world economy of two interdependent countries.",
  "sections": [
    {
      "heading": "Research Question and Framework",
      "content": "- Examines how to design an optimal and sustainable exchange rate regime in a world economy of two interdependent countries.\n- Develops a Barro-Gordon type two-country model.\n- Uses a two-stage game approach to the strategic choice of policy instruments.\n- Compares noncooperative equilibria under different assumptions of monetary policy credibility and different exchange rate regimes."
    },
    {
      "heading": "Key Theoretical Findings",
      "content": "- Identifies regimes that are optimal (in a Pareto sense) and sustainable (self-enforcing).\n- The choice of optimal and sustainable regimes depends fundamentally on the credibility of monetary policy commitments by the two countries’ authorities.\n- The nature of shocks to the economies plays a role in regime selection.\n- The substitutability between goods produced in the two countries also influences the choice of regime.\n- International coordination on instrument choice is necessary to design optimal and sustainable exchange rate regimes."
    },
    {
      "heading": "Policy Implications and Recommendations",
      "content": "- Strengthen credibility of monetary policy commitments to broaden the set of sustainable and Pareto-optimal exchange rate regimes.\n- Consider the cross-country nature of shocks and the degree of goods substitutability when selecting exchange rate arrangements.\n- Pursue international coordination on instrument choice to achieve regimes that are both optimal and self-enforcing.\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/optimal-and-sustainable-exchange-rate-regimes-a-simple-game-theoretic-approach-850"
    }
  ],
  "bullets": [
    "[Markdown version](/en/publications/wp/issues/2016/12/30/optimal-and-sustainable-exchange-rate-regimes-a-simple-game-theoretic-approach-850/index.md)",
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    "Authors: Masahiro Kawai",
    "Published: November 1, 1992",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451852325.001",
    "Examines how to design an optimal and sustainable exchange rate regime in a world economy of two interdependent countries.",
    "Develops a Barro-Gordon type two-country model.",
    "Uses a two-stage game approach to the strategic choice of policy instruments.",
    "Compares noncooperative equilibria under different assumptions of monetary policy credibility and different exchange rate regimes.",
    "Identifies regimes that are optimal (in a Pareto sense) and sustainable (self-enforcing).",
    "The choice of optimal and sustainable regimes depends fundamentally on the credibility of monetary policy commitments by the two countries’ authorities.",
    "The nature of shocks to the economies plays a role in regime selection.",
    "The substitutability between goods produced in the two countries also influences the choice of regime.",
    "International coordination on instrument choice is necessary to design optimal and sustainable exchange rate regimes.",
    "Strengthen credibility of monetary policy commitments to broaden the set of sustainable and Pareto-optimal exchange rate regimes.",
    "Consider the cross-country nature of shocks and the degree of goods substitutability when selecting exchange rate arrangements.",
    "Pursue international coordination on instrument choice to achieve regimes that are both optimal and self-enforcing."
  ],
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