The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria
AbstractWe study a credible Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We demonstrate the existence of two discretionary equilibria. Following a shock the economy can be stabilised either 'quickly' or 'slow', both dynamic paths satisfy conditions of optimality and time-consistency. The model can help us to understand sudden change of the interest rate and exchange rate volatility in 'tranquil' and 'volatile' regimes even under a fully credible 'soft peg' of the nominal exchange rate in developing countries.
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Bibliographic InfoPaper provided by Exeter University, Department of Economics in its series Discussion Papers with number 0904.
Date of creation: 2009
Date of revision:
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Small open economy; Incomplete ?nancial markets; Discretionary Monetary policy; Multiple Equilibria;
Other versions of this item:
- Christoph Himmels & Tatiana Kirsanova, 2009. " The Interest Rate — Exchange Rate Nexus: Exchange Rate Regimes and Policy Equilibria," CDMA Conference Paper Series 0902, Centre for Dynamic Macroeconomic Analysis.
- Christoph Himmels & Tatiana Kirsanova, 2012. "The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria," The School of Economics Discussion Paper Series 1219, Economics, The University of Manchester.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
- E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
- E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
- C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
- F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance
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- Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2013. "Optimal Fiscal Action in an Economy with Sovereign Premia and without Monetary Independence: An Application to Italy," CESifo Working Paper Series 4199, CESifo Group Munich.
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