New study shows fixed exchange rates may reduce macroeconomic volatility.
The article compares different monetary policy rules in a two-country model. It finds that managing exchange rates is necessary to prevent excessive volatility, but doesn't reduce overall economic volatility much. A floating exchange rate with a Taylor-type rule is closest to full price stability, but leads to more interest rate fluctuations. Limiting exchange rate flexibility is beneficial. Interest rates in different countries move in the same direction, while output moves in opposite directions.