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The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria

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  • Christoph Himmels
  • Tatiana Kirsanova

Abstract

We 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 Info

Paper provided by Economics, The University of Manchester in its series The School of Economics Discussion Paper Series with number 1219.

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Date of creation: 2012
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Handle: RePEc:man:sespap:1219

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Postal: Manchester M13 9PL
Phone: (0)161 275 4868
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Web page: http://www.socialsciences.manchester.ac.uk/subjects/economics/
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Cited by:
  1. 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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