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Multiple reserve requirements, exchange rates, sudden stops and equilibrium dynamics in a small open economy

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  • Paula Hernandez-Verme

    ()
    (Universidad de Guanajuato)

  • Wen-Yao Wang

    (Texas A&M University at Galveston)

Abstract

We model a typical Asian-crisis-economy using dynamic general equilibrium techniques. Meaningful exchange rates obtain from nontrivial demands for fiat currencies. Sudden stops/bank-panics are possible, and key for evaluating the relative merits of alternative exchange rate regimes in promoting stability. Strategic complementarities contribute to the severe indeterminacy of the continuum of equilibria; there is a strong association between the scope for existence and indeterminacy of equilibria, the properties along dynamic paths and the underlying policy regime. Binding multiple reserve requirements reduce the scope for financial fragility and panic equilibria; backing the money supply acts as a stabilizer only in fixed regimes.

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Bibliographic Info

Article provided by Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia. in its journal EconoQuantum, Revista de Economia y Negocios.

Volume (Year): 6 (2009)
Issue (Month): 1 (Julio - Diciembre)
Pages: 71-79

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Handle: RePEc:qua:journl:v:6:y:2009:i:1:p:71-79

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Keywords: Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.;

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  1. Chang, Roberto & Velasco, Andres, 2000. "Banks, debt maturity and financial crises," Journal of International Economics, Elsevier, Elsevier, vol. 51(1), pages 169-194, June.
  2. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, Elsevier, vol. 92(1), pages 1-34, May.
  3. Paula Hernandez-Verme, 2004. "Inflation, growth and exchange rate regimes in small open economies," Economic Theory, Springer, Springer, vol. 24(4), pages 839-856, November.
  4. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  5. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, Elsevier, vol. 23(5), pages 701-733, September.
  6. Carmen M. Reinhart & Kenneth S. Rogoff, 2014. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," Annals of Economics and Finance, Society for AEF, vol. 15(2), pages 1065-1188, November.
  7. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 15(2), pages 3-24, Spring.
  8. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls," IMF Occasional Papers 190, International Monetary Fund.
  9. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  10. Roberto Chang & Andrés Velasco, 2001. "A Model Of Financial Crises In Emerging Markets," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 116(2), pages 489-517, May.
  11. Reinhart, Carmen & Reinhart, Vincent, 1999. "On the use of reserve requirements in dealing with capital flow problems," MPRA Paper 13703, University Library of Munich, Germany.
  12. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
  13. Valerie R. Bencivenga & Elisabeth Huybens & Bruce D. Smith, 2002. "What to stabilize in the open economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1289-1307, November.
  14. Graciela L. Kaminsky, 2003. "Varieties of Currency Crises," NBER Working Papers 10193, National Bureau of Economic Research, Inc.
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