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Financial Frictions And The Choice Of Exchange Rate Regimes

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  • ESTER FAIA

Abstract

"This article provides a quantitative assessment of the role of financial frictions in the choice of exchange rate regimes. I use a two-country model with sticky prices to compare different exchange rate arrangements. I simulate the model without and with borrowing constraints on investment, under monetary policy and technology shocks. I find that the stabilization properties of floating exchange rate regimes in face of foreign shocks are enhanced relative to fixed exchange rate in presence of credit frictions. In presence of symmetric and correlated shock, fixed exchange rates regimes can perform better than floating. This analysis can have important policy implications for accession countries joining the European Exchange Rate Mechanism II system and with high degrees of credit frictions." ("JEL" E3, E42, E44, E52, F41) Copyright (c) 2009 Western Economic Association International.

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Bibliographic Info

Article provided by Western Economic Association International in its journal Economic Inquiry.

Volume (Year): 48 (2010)
Issue (Month): 4 (October)
Pages: 965-982

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Handle: RePEc:bla:ecinqu:v:48:y:2010:i:4:p:965-982

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Cited by:
  1. Giovanni Lombardo & Luca Dedola, 2010. "Financial Frictions, Financial Integration and the International Propagation of Shocks," 2010 Meeting Papers 288, Society for Economic Dynamics.
  2. Mara Pirovano, 2013. "Household and firm leverage, capital flows and monetary policy in a small open economy," Working Paper Research 246, National Bank of Belgium.
  3. Lilia Cavallari & Stefano D'Addona, 2013. "Business cycle determinants of US foreign direct investments," Applied Economics Letters, Taylor & Francis Journals, vol. 20(10), pages 966-970, July.
  4. Cakici, S. Meral, 2011. "Financial integration and business cycles in a small open economy," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1280-1302.
  5. PIROVANO, Mara, 2013. "International financial integration, credit frictions and exchange rate regimes," Working Papers 2013015, University of Antwerp, Faculty of Applied Economics.
  6. Cakici, S. Meral, 2012. "Technology shocks under varying degrees of financial openness," International Review of Economics & Finance, Elsevier, vol. 21(1), pages 232-245.
  7. Marcin Kolasa & Giovanni Lombardo, 2011. "Financial frictions and optimal monetary policy in an open economy," National Bank of Poland Working Papers 91, National Bank of Poland, Economic Institute.

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