Further Essays in Monetary Economics (Collected Works of Harry Johnson)

Chapter 10

Five Notes¹

1. The Welfare Costs of Exchange Rate Stabilization*

This note is concerned with the welfare costs to a country, to the rest of the world, and to the world as a whole, of the stabilization of the country’s exchange rate in the face of fluctuations in its domestic price level relative to the foreign price level. Such stabilization is effected by the accumulation and decumulation of exchange reserves. In real terms, a surplus in the trade balance used to finance the accumulation of reserves involves a transfer to the rest of the world; and, conversely, the use of reserves to finance the trade deficit involves receipt of a transfer from the rest of the world. If countries are assumed to maintain full employment, it must also ...