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The debate about the appropriate choice of exchange rate regime is fundamental in international economics. This paper develops a small open-economy model with balance sheet effects and compares the performance of fixed and flexible exchange rate regimes. The model is solved up to a second-order approximation which allows us to address the issue of risk and welfare rigorously. The paper identifies threshold levels of the debt-to-GDP ratio above which fixed exchange rate regimes are welfare superior to monetary policy rules that imply flexible exchange rate regimes. The results suggest that emerging market economies that suffer from a relatively high level of indebtedness and are constrained in their pursuit of optimal monetary policy, could find it beneficial to opt for a fixed exchange rate regime.

Foreign exchange rates --- Monetary policy --- Debts, External --- Foreign Exchange --- Investments: General --- Macroeconomics --- Open Economy Macroeconomics --- Macroeconomics: Consumption --- Saving --- Wealth --- Investment --- Capital --- Intangible Capital --- Capacity --- Currency --- Foreign exchange --- Exchange rate arrangements --- Exchange rate flexibility --- Conventional peg --- Consumption --- Return on investment --- National accounts --- Economics --- Saving and investment --- United States

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This paper uses a variant of the IMF's Global Economy Model (GEM) to estimate the macroeconomic effects of Yemen's full accession into the Gulf Cooperation Council (GCC). After calibrating the model to Yemen and the GCC countries, several simulations were carried out to estimate the potential impact of economic integration on both. The paper draws two fundamental conclusions. First, further steps in regional integration would enhance competition and produce large economic benefits for both Yemen and the GCC countries. In particular, we show that in some cases economic integration could increase GDP in Yemen by as much as 18 percent and in the GCC by as much as 20 percent over the long run. Second, even if market structures do not improve substantially, GCC enlargement can still generate substantial spillover gains with consumption increasing by up to 7 percent in Yemen and 8 percent in the GCC, respectively.

Competition, International. --- International competition --- World economics --- International relations --- International trade --- War --- Economic aspects --- Gulf Cooperation Council. --- Gulf Co-operation Council --- Co-operation Council for the Arab States of the Gulf --- States of Gulf Co-operation Council --- Golf-Rat --- GCC --- G.C.C. --- Majlis al-Taʻāwun al-Khalījī --- Majlis al-Taʻāwun al-Khalījī al-ʻArabī --- GKR --- Kooperationsrat Arabischer Staaten am Golf --- Cooperation Council for the Arab States of the Gulf --- Duwal Majlis al-Khalīj --- Gŏlpʻŭ Hyŏmnyŏk Wiwŏnhoe --- Kŏlpʻŭ Hyŏmnyŏk Wiwŏnhoe --- Majlis al-Taʻāwun li-Duwal al-Khalīj al-ʻArabīyah --- Golfkooperationsrat --- AGCC --- A.G.C.C. --- Duwal Majlis al-Taʻāwun al-Khalījī --- Sovet sotrudnichestva arabskikh gosudarstv Persidskogo zaliva --- SSAGPZ --- Arab Gulf Cooperation Council --- مجلس التعاون الخليجي --- مجلس التعاون لدول الخليج العربية --- Shūrā-yi Hamkārī-i Khalīj-i Fārs --- شوراى همکارى خليج فارس --- Persian Gulf Cooperation Council --- PGCC --- Conseil de coopération du Golfe --- Gulf Cooperative Council --- Consiglio di cooperazione del Golfo --- Ccg --- Yemen (Arab Republic) --- Arabische Republik Jemen --- Arab Yemeni Republic --- République arabe yéménite --- Arab Republic of Yemen --- Jumhūrīyah al-ʻArabīyah al-Yamanīyah --- YAR --- Y.A.R. --- République arabe du Yémen --- Republiḳah ha-ʻArvit ha-Temanit --- Temān --- Noord-Jemen (Republic) --- Yemen (Ṣanʻāʼ) --- Yemen (Republic) --- Econometric models. --- Finance: General --- Foreign Exchange --- Labor --- Macroeconomics --- International Economic Order and Integration --- Open Economy Macroeconomics --- Macroeconomic Aspects of International Trade and Finance: Forecasting and Simulation --- General Financial Markets: General (includes Measurement and Data) --- Demand and Supply of Labor: General --- Macroeconomics: Consumption --- Saving --- Wealth --- Finance --- Labour --- income economics --- Currency --- Foreign exchange --- Labor markets --- Competition --- Consumption --- Real exchange rates --- Commodity markets --- Financial markets --- National accounts --- Labor market --- Economics --- Commodity exchanges --- Yemen, Republic of --- Income economics