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Automatic stabilizer feature of fixed exchange rate regimes

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  • Aysun, Uluc

Abstract

This paper shows that countries characterized by a financial accelerator mechanism may reverse the usual finding of the literature -- flexible exchange rate regimes do a worse job of insulating open economies from external shocks. I obtain this result with a calibrated small open economy model that endogenizes foreign interest rates by linking them to the banking sector's financial leverage. This relationship renders exchange rate policy more important compared to the usual exogeneity assumption. I find empirical support for this prediction using the Local Projections method. Finally, 2nd order approximation to the model finds larger welfare losses under flexible exchange rate regimes.

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Bibliographic Info

Article provided by Elsevier in its journal Emerging Markets Review.

Volume (Year): 9 (2008)
Issue (Month): 4 (December)
Pages: 302-328

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Handle: RePEc:eee:ememar:v:9:y:2008:i:4:p:302-328

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Web page: http://www.elsevier.com/locate/inca/620356

Related research

Keywords: Exchange rates EMBI Financial accelerator Welfare;

References

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Cited by:
  1. Uluc Aysun & Ryan Brady & Adam Honig, 2011. "Financial Frictions and the Credit Channel of Monetary Transmission," Working Papers 2011-03, University of Central Florida, Department of Economics.
  2. Aysun, Uluc & Honig, Adam, 2011. "Bankruptcy costs, liability dollarization, and vulnerability to sudden stops," Journal of Development Economics, Elsevier, vol. 95(2), pages 201-211, July.

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