Currency Mismatch, Openness and Exchange Rate Regime Choice
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Date
2004-09-01
Authors
Magud, Nicolas
Journal Title
Journal ISSN
Volume Title
Publisher
University of Oregon, Dept of Economics
Abstract
The paper analyzes the choice of an exchange rate regime for a small open economy indebted in foreign currency, incorporating the ¯nancial accelerator. Conventional wisdom suggests that floating regimes should insulate the economy from real shocks. I show that this result depends on the degrees of openness of the economy and foreign currency indebtedness and, in fact, does not hold for relatively closed economies. The transmission mechanism relies on nonlinearities in the impact of unanticipated real price changes on the external finance premium, in the spirit Fisher (1933).
Description
41 p.
Keywords
Currency mismatch, Liability dollarization, Balance sheets, Exchange rate regimes, Openness, Nominal rigidities