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Inflation, growth and exchange rate regimes in small open economies

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  • Paula Hernandez-Verme

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Abstract

This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Endogenously arising volatility may be observed independently of the exchange rate regime. Private information - with high rates of domestic inflation - increases the scope for indeterminacy and economic fluctuations. Copyright Springer-Verlag Berlin/Heidelberg 2004

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File URL: http://hdl.handle.net/10.1007/s00199-002-0338-z
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Bibliographic Info

Article provided by Springer in its journal Economic Theory.

Volume (Year): 24 (2004)
Issue (Month): 4 (November)
Pages: 839-856

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Handle: RePEc:spr:joecth:v:24:y:2004:i:4:p:839-856

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Related research

Keywords: Endogenously arising volatility; Exchange rate regimes; Private information.;

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References

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  1. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
  2. Levine, Ross & Loayza, Norman & Beck, Thorsten, 1999. "Financial intermediation and growth : Causality and causes," Policy Research Working Paper Series 2059, The World Bank.
  3. King, Robert G & Levine, Ross, 1993. "Finance and Growth: Schumpeter Might Be Right," The Quarterly Journal of Economics, MIT Press, vol. 108(3), pages 717-37, August.
  4. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1.
  5. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, vol. 47(2), pages 221-248, April.
  6. Rothschild, Michael & Stiglitz, Joseph E, 1976. "Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information," The Quarterly Journal of Economics, MIT Press, vol. 90(4), pages 630-49, November.
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Citations

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Cited by:
  1. Jingping Gu & Paula Hernandez-Verme, 2009. "A Semiparametric Time Trend Varying Coefficients Model: With An Application to Evaluate Credit Rationing in U.S. Credit Market," Department of Economics and Finance Working Papers EM200902, Universidad de Guanajuato, Department of Economics and Finance.
  2. Petreski, Marjan, 2009. "Exchange-rate regime and economic growth: a review of the theoretical and empirical literature," Economics Discussion Papers 2009-31, Kiel Institute for the World Economy.
  3. Wang, Wen-Yao & Hernandez-Verme, Paula, 2009. "Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy," MPRA Paper 13802, University Library of Munich, Germany.
  4. Mohanty, Biswajit & Bhanumurthy, N.R., 2014. "Exchange rate regimes and inflation: Evidence from India," Working Papers 14/130, National Institute of Public Finance and Policy.
  5. Petreski, Marjan, 2009. "Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data," Economics Discussion Papers 2009-49, Kiel Institute for the World Economy.
  6. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer, vol. 53(2), pages 357-382, June.

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