Real and Monetary Uncertainty Under Alternative Exchange Rate Regimes

Looking at the choice of the exchange rate regime as the outcome of a principal-agent game facing the government with the local monetary authority, this paper tries to draw some conclusions about the properties of different alternatives. Our results seem to be consistent with the intuition that fixed exchange rate agreements are not likely to be settled among countries where the more unstable one has a dominant size, and also with other previous results suggesting that floating exchange rates might lead to more stable outcomes than fixed rates in both countries.