Financial crises and exchange rate policy

Citació

  • Fornaro L. Financial crises and exchange rate policy. Journal of International Economics. 2015 Mar;95(2):202-15. DOI: 10.1016/j.jinteco.2014.11.009

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Descripció

  • Resum

    This paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and Fisherian deflation. The goal is to evaluate the performance of alternative exchange rate policies in sudden stop-prone economies. The key element of the analysis is a pecuniary externality arising from frictions in the international credit markets, which creates a trade-off between price and financial stability. The main result is that depreciating the exchange rate during a financial crisis has a positive impact on welfare, because the stimulus provided by a depreciation sustains asset prices, value of collateral, and access to the international credit markets.
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