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Inflation, Growth and Exchange Rate Regimes in Small Open Economies

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Author Info
Paula Hernandez-Verme () (School of Economics, Universidad de Guanajuato)
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. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations.

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Paper provided by Universidad de Guanajuato in its series School of Economics Working Papers with number EC200906.

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Length: 89 pages
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Handle: RePEc:gua:wpaper:ec200905

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Related research
Keywords: Currency Board; Endogenously Arising Volatility; Fixed exchange rates; Floating exchange rates; Growth; Indeterminacy; Inflation; Multiple Reserve Requirements; Private Information; Stabilization;

Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies
G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation
O16 - Economic Development, Technological Change, and Growth - - Economic Development - - - Financial Markets; Saving and Capital Investment

References listed on IDEAS
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  1. Jeffrey A. Frankel & Sergio L. Schmukler & Luis Serven, 2002. "Global Transmission of Interest Rates: Monetary Independence and Currency Regime," NBER Working Papers 8828, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  2. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June. [Downloadable!] (restricted)
    Other versions:
  3. Paula Hernandez-Verme, 2004. "Inflation, growth and exchange rate regimes in small open economies," Economic Theory, Springer, vol. 24(4), pages 839-856, November. [Downloadable!] (restricted)
  4. 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, vol. 43(4), pages 1289-1307, November. [Downloadable!] (restricted)
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This page was last updated on 2009-11-28.

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