Fornaro, Luca2023-01-252023-01-252015Fornaro L. Financial crises and exchange rate policy. Journal of International Economics. 2015 Mar;95(2):202-15. DOI: 10.1016/j.jinteco.2014.11.0090022-1996http://hdl.handle.net/10230/55437This 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.application/pdfeng© Elsevier http://dx.doi.org/10.1016/j.jinteco.2014.11.009info:eu-repo/semantics/articlehttp://dx.doi.org/10.1016/j.jinteco.2014.11.009Financial crisesMonetary policySudden stopsExchange rate regimeNominal wage rigiditiesPecuniary externalitiesinfo:eu-repo/semantics/openAccess