Advanced Search
MyIDEAS: Login to save this paper or follow this series

Balance Sheets, Exchange Rate Policy, and Welfare

Contents:

Author Info

  • Selim Elekdag
  • Ivan Tchakarov

Abstract

The debate about the appropriate choice of exchange rate regime is fundamental in international economics. This paper develops a small open-economy model with balance sheet effects and compares the performance of fixed and flexible exchange rate regimes. The model is solved up to a second-order approximation which allows us to address the issue of risk and welfare rigorously. The paper identifies threshold levels of the debt-to-GDP ratio above which fixed exchange rate regimes are welfare superior to monetary policy rules that imply flexible exchange rate regimes. The results suggest that emerging market economies that suffer from a relatively high level of indebtedness and are constrained in their pursuit of optimal monetary policy, could find it beneficial to opt for a fixed exchange rate regime.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.imf.org/external/pubs/cat/longres.aspx?sk=17293
Download Restriction: no

Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 04/63.

as in new window
Length: 37
Date of creation: 01 Apr 2004
Date of revision:
Handle: RePEc:imf:imfwpa:04/63

Contact details of provider:
Postal: International Monetary Fund, Washington, DC USA
Phone: (202) 623-7000
Fax: (202) 623-4661
Email:
Web page: http://www.imf.org/external/pubind.htm
More information through EDIRC

Order Information:
Web: http://www.imf.org/external/pubs/pubs/ord_info.htm

Related research

Keywords: Economic models; exchange rate; exchange rate regimes; exchange rate regime; flexible exchange rate; fixed exchange rate; exchange rate policy; flexible exchange rate regimes; exchange rates; open economy; nominal exchange rate; fixed exchange rate regime; external shocks; elasticity of substitution; exchange rate flexibility; exchange rate fluctuations; flexible exchange rates; aggregate consumption; policy regimes; flexible exchange rate regime; exchange rate movements; fixed exchange rate regimes; nominal exchange rate depreciation; equilibrium model; floating exchange rate; imported good; currency risk; fixed exchange rates; open economies; exchange rate risk; exchange rate depreciation; political economy; export volumes; optimal exchange rate regime; exchange rate uncertainty; exchange rate volatility; floating exchange rate regime; domestic firms; trade shocks; price of imports; domestic production; alternative exchange rate; domestic goods; terms of trade; nominal interest rate; foreign exchange; alternative exchange rate regimes; terms of trade shocks; real exchange rate;

Other versions of this item:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. David K. Backus & Patrick J. Kehoe & Finn E. Kydland, 1987. "International real business cycles," Working Papers, Federal Reserve Bank of Minneapolis 426, Federal Reserve Bank of Minneapolis.
  2. Lawrence J. Christiano & Martin Eichenbaum & Charles L. Evans, 1996. "Sticky price and limited participation models of money: a comparison," Staff Report, Federal Reserve Bank of Minneapolis 227, Federal Reserve Bank of Minneapolis.
  3. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  4. Uribe, Martin & Yue, Vivian Z., 2006. "Country spreads and emerging countries: Who drives whom?," Journal of International Economics, Elsevier, Elsevier, vol. 69(1), pages 6-36, June.
  5. Mark Gertler & Simon Gilchrist & Fabio Natalucci, 2003. "External Constraints on Monetary Policy and the Financial Accelerator," NBER Working Papers 10128, National Bureau of Economic Research, Inc.
  6. Bernanke, B. & Gertler, M. & Gilchrist, S., 1998. "The Financial Accelerator in a Quantitative Business Cycle Framework," Working Papers, C.V. Starr Center for Applied Economics, New York University 98-03, C.V. Starr Center for Applied Economics, New York University.
  7. Pablo A. Neumeyer & Fabrizio Perri, 2001. "Business Cycles in Emerging Economies:The Role of Interest Rates," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 01-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  8. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  9. Jinill Kim & Sunghyun Henry Kim, 1999. "Spurious Welfare Reversals in International Business Cycle Models," Virginia Economics Online Papers 319, University of Virginia, Department of Economics.
  10. Paul R. Bergin & Ivan Tchakarov, 2003. "Does Exchange Rate Risk Matter for Welfare?," NBER Working Papers 9900, National Bureau of Economic Research, Inc.
  11. Nobuhiro Kiyotaki & John Moore, 1995. "Credit Cycles," NBER Working Papers 5083, National Bureau of Economic Research, Inc.
  12. Luis Felipe Céspedes & Roberto Chang & Andrés Velasco, 2004. "Balance Sheets and Exchange Rate Policy," American Economic Review, American Economic Association, American Economic Association, vol. 94(4), pages 1183-1193, September.
  13. Devereux, Michael B., 2004. "Monetary policy rules and exchange rate flexibility in a simple dynamic general equilibrium model," Journal of Macroeconomics, Elsevier, Elsevier, vol. 26(2), pages 287-308, June.
  14. Philip R. Lane & Gian Maria Milesi-Ferretti, 2002. "Long-Term Capital Movements," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 2001, Volume 16, pages 73-136 National Bureau of Economic Research, Inc.
  15. Michael B. Devereux & Philip Lane, 2001. "Exchange Rates and Monetary Policy in Emerging Market Economies," Trinity Economics Papers, Trinity College Dublin, Department of Economics 200111, Trinity College Dublin, Department of Economics.
  16. Stephanie Schmitt-Grohe & Martin Uribe, 2000. "Stabilization Policy and the Costs of Dollarization," Departmental Working Papers, Rutgers University, Department of Economics 200006, Rutgers University, Department of Economics.
  17. Robert Kollmann, 2002. "Monetary policy rules in the open economy: effects of welfare and business cycles," ULB Institutional Repository 2013/7628, ULB -- Universite Libre de Bruxelles.
  18. Sutherland, Alan, 2002. "A Simple Second-Order Solution Method For Dynamic General Equilibrium Models," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3554, C.E.P.R. Discussion Papers.
  19. Barry Eichengreen & Ricardo Hausmann, 1999. "Exchange Rates and Financial Fragility," NBER Working Papers 7418, National Bureau of Economic Research, Inc.
  20. Pierpaolo Benigno, 2009. "Price Stability with Imperfect Financial Integration," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 41(s1), pages 121-149, 02.
  21. Lars Ljungqvist & Thomas J. Sargent, 2004. "Recursive Macroeconomic Theory, 2nd Edition," MIT Press Books, The MIT Press, The MIT Press, edition 2, volume 1, number 026212274x, December.
  22. David Cook & Woon Gyu Choi, 2002. "Liability Dollarization and the Bank Balance Sheet Channel," IMF Working Papers 02/141, International Monetary Fund.
  23. Calvo, Guillermo A., 1983. "Staggered prices in a utility-maximizing framework," Journal of Monetary Economics, Elsevier, Elsevier, vol. 12(3), pages 383-398, September.
  24. Yun, Tack, 1996. "Nominal price rigidity, money supply endogeneity, and business cycles," Journal of Monetary Economics, Elsevier, Elsevier, vol. 37(2-3), pages 345-370, April.
  25. Christopher D Carroll, 1990. "Buffer-Stock Saving and the Life Cycle/Permanent Income Hypothesis," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 371, The Johns Hopkins University,Department of Economics, revised Aug 1996.
  26. Cook, David, 2004. "Monetary policy in emerging markets: Can liability dollarization explain contractionary devaluations?," Journal of Monetary Economics, Elsevier, Elsevier, vol. 51(6), pages 1155-1181, September.
  27. Robert Kollmann, 2004. "Welfare Effects of a Monetary Union: The Role of Trade Openness," Journal of the European Economic Association, MIT Press, MIT Press, vol. 2(2-3), pages 289-301, 04/05.
  28. Rotemberg, Julio J, 1982. "Sticky Prices in the United States," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 90(6), pages 1187-1211, December.
  29. Miles S. Kimball, 1989. "Precautionary Saving in the Small and in the Large," NBER Working Papers 2848, National Bureau of Economic Research, Inc.
  30. Stephanie Schmitt-Grohe & Martin Uribe, 2001. "Solving Dynamic General Equilibrium Models Using a Second-Order Approximation to the Policy Function," Departmental Working Papers, Rutgers University, Department of Economics 200106, Rutgers University, Department of Economics.
  31. Kenneth L. Judd, 1998. "Numerical Methods in Economics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262100711, December.
  32. Cedric Tille, 2002. "How valuable is exchange rate flexibility? Optimal monetary policy under sectoral shocks," Staff Reports, Federal Reserve Bank of New York 147, Federal Reserve Bank of New York.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:imf:imfwpa:04/63. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Jim Beardow) or (Hassan Zaidi).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.