Essays on exchange rate regimes and international financial crises
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.
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
JEL classification: E31, E32, E42, E44, F31, F33, G14, G18, O16
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
Date of Publication: