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Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy

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  • Wang, Wen-Yao
  • Hernandez-Verme, Paula

Abstract

We model a typical Asian-crisis-economy using dynamic general equilibrium techniques. Meaningful exchange rates obtain from nontrivial demands for fiat currencies. Sudden stops/bank-panics are possible, and key for evaluating the relative merits of alternative exchange rate regimes in promoting stability. Strategic complementarities contribute to the severe indeterminacy of the continuum of equilibria; there is a strong association between the scope for existence and indeterminacy of equilibria, the properties along dynamic paths and the underlying policy regime. Binding multiple reserve requirements reduce the scope for financial fragility and panic equilibria; backing the money supply acts as a stabilizer only in fixed regimes.

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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13802.

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Date of creation: 05 Mar 2009
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Handle: RePEc:pra:mprapa:13802

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Keywords: Sudden stops; Exchange rate regimes; Multiple reserve requirements;

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  1. Carmen M. Reinhart & Kenneth S. Rogoff, 2008. "This Time is Different: A Panoramic View of Eight Centuries of Financial Crises," NBER Working Papers 13882, National Bureau of Economic Research, Inc.
  2. 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.
  3. Graciela L. Kaminsky, 2003. "Varieties of Currency Crises," NBER Working Papers 10193, National Bureau of Economic Research, Inc.
  4. Paula Hernandez-Verme, 2004. "Inflation, growth and exchange rate regimes in small open economies," Economic Theory, Springer, vol. 24(4), pages 839-856, November.
  5. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
  6. Roberto Chang & Andrés Velasco, 2001. "A Model Of Financial Crises In Emerging Markets," The Quarterly Journal of Economics, MIT Press, vol. 116(2), pages 489-517, May.
  7. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May.
  8. Reinhart, Carmen & Kaminsky, Graciela, 1999. "The twin crises: The causes of banking and balance of payments problems," MPRA Paper 14081, University Library of Munich, Germany.
  9. 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.
  10. Akira Ariyoshi & Andrei Kirilenko & Inci Ötker & Bernard Laurens & Jorge Iván Canales Kriljenko & Karl Friedrich Habermeier, 2000. "Capital Controls," IMF Occasional Papers 190, International Monetary Fund.
  11. 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.
  12. Reinhart, Carmen M & Reinhart, Vincent R, 1999. "On the Use of Reserve Requirements in Dealing with Capital Flow Problems," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 4(1), pages 27-54, January.
  13. Chang, Roberto & Velasco, Andres, 2000. "Banks, debt maturity and financial crises," Journal of International Economics, Elsevier, vol. 51(1), pages 169-194, June.
  14. Reinhart, Carmen & Calvo, Guillermo, 2000. "When Capital Inflows Come to a Sudden Stop: Consequences and Policy Options," MPRA Paper 6982, University Library of Munich, Germany.
  15. Adam Bennett & Eduardo Borensztein & Tomás J. T. Baliño, 1999. "Monetary Policy in Dollarized Economies," IMF Occasional Papers 171, International Monetary Fund.
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