TY - JOUR AU - Devereux, Michael B AU - Engel, Charles TI - The Optimal Choice of Exchange-Rate Regime: Price-Setting Rules and Internationalized Production JF - National Bureau of Economic Research Working Paper Series VL - No. 6992 PY - 1999 Y2 - March 1999 DO - 10.3386/w6992 UR - http://www.nber.org/papers/w6992 L1 - http://www.nber.org/papers/w6992.pdf N1 - Author contact info: Michael B. Devereux Department of Economics University of British Columbia 997-1873 East Mall Vancouver, BC V6T 1Z1 CANADA Tel: 604/822-2542 Fax: 604/822-5915 E-Mail: mbdevereux@gmail.com Charles Engel Department of Economics University of Wisconsin 1180 Observatory Drive Madison, WI 53706-1393 Tel: 608/262-3697 Fax: 608/262-2033 E-Mail: cengel@ssc.wisc.edu M1 - published as Michael B. Devereux, Charles Engel. "The Optimal Choice of Exchange Rate Regime: Price-Setting Rules and Internationalized Production," in Magnus Blomstrom and Linda S. Goldberg, editors, "Topics in Empirical International Economics: A Festschrift in Honor of Robert E. Lipsey" University of Chicago Press (2001) AB - We investigate the choice of exchange-rate regime fixed or floating in a dynamic, intertemporal general equilibrium framework. Our framework extends Devereux and Engel (1998) by investigating the implications of internationalized production. We examine the role of price-setting -- whether prices are set in the currency of producers or the currency of consumers in determining the optimality of exchange-rate regimes in an environment of uncertainty created by monetary shocks. We find that when prices are set in producers' currencies, floating exchange rates are preferred when the country is large enough, or not too risk averse. On the other hand, floating exchange rates are always preferred when prices are set in consumers' currencies because floating exchange rates allow domestic consumption to be insulated from foreign monetary shocks. The gains from floating exchange rates are greater when there is internationalized production in this case. ER -