A Study On Optimal Exchange Rate Policy With Coefficient Of Relative Aversion

The choice between fixed and flexible exchange rates has long been an important issue in international economics. Since the 1990s, with the practice of European monetary integration and the acceleration of economic integration of NAFA, also with the consideration of East Asian monetary cooperation, more and more countries began to recognize that the choice of exchange rate policy was no longer a one out of two problem. The monetary integration has already become the world's regional economic development trend. So we can not help think that in this international economic situation, how to judge whether individual countries should join the currency union, and when to join the currency area is the best opportunity If one country is not suitable to join the currency union, what is its optimal exchange rate policyIn this paper, we considered a small open economy model with coefficient of relative risk aversion of individuals. In the model, firm owners and workers are risk averse and workers more so. Wages are given or partially indexed in the short run, the capital markets are imperfect. The government's exchange rate policy could be viewed as a role to allocate risk between workers and owners. With greater difference in risk aversion between workers and firms, the optimal exchange rate should vary little with terms-of-trade shocks. Optimal exchange variation is greater with indexed wages, but is smaller when firms behave monopolistically or wage taxes exist. The model gives some theoretical complements for determining optimal variations of the exchange rate, and indicates when it is optimal to join a currency union with trading partners.