Discussion of " Can Endogenous Changes in Price Flexibility Alter the Relative Welfare Performance of Exchange Rate Regimes

This is a very nice and elegant paper by Ozge Senay and Alan Sutherland. The main objective of the paper is to examine the extent to which changes in the degree of price flexibility modify the ranking of alternative monetary policy regimes in an open economy framework. The model that the authors propose belongs to the New Open Economy Macro (NOEM) literature which builds models following the New Keynesian tradition along with rigorous microfoundations. While most of the literature (with the exception of Devereux, 2004) is based on the assumption that the degree of price flexibility is exogenously fixed, Senay and Sutherland depart from it by endogenizing the degree of nominal rigidity. In my comments I will summarize briefly Senay and Sutherland's contribution, compare their results with what we have learned from the literature so far and discuss the implications of some (key) assumptions.