PURCHASING POWER PARITY VERSUS FIXED EXCHANGE RATE RULES: A STABILITY AND WELFARE ANALYSIS*

摘要

This paper evaluates the desirability of PPP rules vis-a-vis fixed exchange rates both in terms of welfare and stability properties. The analysis is conducted within a small open-economy New Keynesian framework extended to include a cost channel. In terms of stability, we find that while the equilibrium is always unique under fixed exchange rates its uniqueness critically depends upon the presence/absence of the cost channel under a PPP rule. Overall, then, in terms of welfare a fixed exchange rate always outperforms a PPP rule.