Globalization and exchange rate policy

1. Choices and tradeoffs

1.1. level

1.1.1. depreciated

1.1.2. appreciated

1.2. regime

1.2.1. fixed

1.2.1.1. to lower exchange rate risk and transaction costs that can impede international trade and investment

1.2.2. floating

1.2.2.1. allows a government to pursue its own independent monetary policy

2. Political factors (Government faces pressure)

2.1. for purchasing power, from consumers

2.2. for favorable relative price effects, especially from tradeables producers

2.3. for reduced volatility, from those who are internationally exposed

3. Politics

3.1. theoretical

3.1.1. they presuppose that policy is made on welfare grounds.

3.2. empirical

3.2.1. there is little evidence that existing currency unions met optimal currency area criteria when they were created

4. Special interest groups

4.1. international

4.2. domestic economic activity

4.2.1. also gain from an appreciation as the dome- stic currency prices of imported goods fall, lowering the cost of living