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Currency mismatch, openness and exchange rate regime choice

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  • Magud, Nicolas E.
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    Abstract

    The paper analyzes the choice of an exchange rate regime for a small open economy indebted in foreign-currency, incorporating the financial accelerator. Conventional wisdom suggests that floating regimes should insulate the economy from real shocks. I show that this result depends on the degree of openness of the economy and foreign-currency indebtedness and, in fact, does not hold for relatively closed economies. The transmission mechanism relies on non-linearities in the impact of unanticipated real price changes on the external finance premium in the spirit of Fisher (1933).

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 1 (March)
    Pages: 68-89

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:68-89

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    Web page: http://www.elsevier.com/locate/inca/622617

    Related research

    Keywords: Currency mismatch Liability dollarization Balance sheets Exchange rate regimes Openness Nominal rigidities;

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    Cited by:
    1. Herman Kamil, 2012. "How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America," IMF Working Papers 12/69, International Monetary Fund.
    2. Lahura, Erick & Vega, Marco, 2013. "Regímenes cambiarios y desempeño macroeconómico: Una evaluación de la literatura," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 26, pages 101-119.
    3. Luis Carranza & José Enrique Galdón Sánchez & Javier Gómez Biscarri, . "The relationship between investment and large exchange rate depreciations in dollarized economies," Faculty Working Papers 01/08, School of Economics and Business Administration, University of Navarra.
    4. Bruno Coric, 2011. "The financial accelerator effect: concept and challenges," Financial Theory and Practice, Institute of Public Finance, vol. 35(2), pages 171-196.

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