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Essays on exchange rate regimes and international financial crises

by Hernandez-Verme, Paula Lourdes.

Abstract (Summary)
What are the relative merits of different exchange rate regimes in small open economies? I investigate this question along the following dimensions: the successful achievement of low and stable rates of inflation, the promotion of financial deepening, and their consequences for the level of real activity. This paper models two small open economies that reproduce several aspects of the Peruvian and Argentinean economies subsequent to their stabilizations, and that differ only in their choice of exchange rate regime. Financial intermediaries perform a real allocative function in the presence of multiple reserve requirements and obvious credit market frictions that may or may not cause credit to be rationed. There are no legal restrictions regarding the use of foreign currency or investment abroad. Under floating exchange rates, the ability to raise the domestic rate of inflation above the foreign rate of inflation can increase production if credit is rationed. However, ? I would like to thank Leonardo Auernheimer, Valerie Bencivenga, Dean Corbae, Scott Freeman, Todd Keister, Beatrix Paal, and Maxwell Stinchcombe for very helpful comments and suggestions. I thank very specially Bruce Smith. The paper has also benefited from the discussions in the seminars in CIDE, the Federal Reserve Bank of Atlanta, the Federal Reserve Bank of Kansas City, Indiana University, ITAM, Purdue University, the Second Annual Missouri Economics Conference, Texas A & M University, the University of Missouri and the University of Texas at Austin. 7 there is a limitation on the extent to which inflation can be used to stimulate production: in the model there exist inflation thresholds. If inflation is increased beyond the threshold level, adverse consequences for real activity will be observed. Under either fixed or floating exchange rate regimes, the consequences of changes in domestic or foreign inflation can differ dramatically, depending on whether or not credit rationing is observed. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –coupled with high rates of domestic inflation- increases the scope for indeterminacy and for economic fluctuations. JEL classification: E31, E32, E42, E44, F31, F33, G14, G18, O16
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School:The University of Texas at Austin

School Location:USA - Texas

Source Type:Master's Thesis

Keywords:foreign exhange rates exchange monetary policy inflation finance latin america

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