Quoc Hung Nguyen () (University of British Columbia)
Abstract
This paper addresses the question of whether fear of floating in developing countries can be justified as optimal discretionary monetary policy in a dollarized economy where intermediate goods importers face Bernanke-type credit constraint. Exchange rate depreciation not only worsens the net-worth but also increases the financing amount of importer firms who borrow in foreign currency, hence exaggerating the borrowing finance premium. Besides, because of high exchange rate passthrough, fluctuations in the exchange rate also have strong impacts on domestic price levels and production. These effects, together, magnify the macroeconomic consequences of the economy that experiences external and domestic technology shocks. It can be shown that the fixed exchange rate regime dominates the inflation targeting regime in both the role of cushioning shocks and in welfare terms.
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Publisher Info
Paper provided by Development and Policies Research Center (DEPOCEN), Vietnam in its series Working Papers with number
16.
Find related papers by JEL classification: F0 - International Economics - - General F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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