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Inflation, Growth and Exchange Rate Regimes in Small Open Economies

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  • Hernandez-Verme, Paula

Abstract

Summary. This is an extended working paper version of the paper that appeared in Economic Theory. It 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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File URL: http://mpra.ub.uni-muenchen.de/16699/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 16699.

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Date of creation: Aug 2002
Date of revision: Aug 2009
Handle: RePEc:pra:mprapa:16699

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

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References

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  1. By Mohsin S. Khan & Abdelhak S. Senhadji, 2001. "Threshold Effects in the Relationship Between Inflation and Growth," IMF Staff Papers, Palgrave Macmillan, vol. 48(1), pages 1.
  2. Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, Elsevier, vol. 36(3), pages 477-496, December.
  3. Boyd, John H. & Levine, Ross & Smith, Bruce D., 2001. "The impact of inflation on financial sector performance," Journal of Monetary Economics, Elsevier, Elsevier, vol. 47(2), pages 221-248, April.
  4. King, Robert G. & Levine, Ross, 1993. "Finance and growth : Schumpeter might be right," Policy Research Working Paper Series 1083, The World Bank.
  5. Bruce D. Smith & John H. Boyd, 1998. "Capital market imperfections in a monetary growth model," Economic Theory, Springer, Springer, vol. 11(2), pages 241-273.
  6. repec:fth:wobaco:1083 is not listed on IDEAS
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Cited by:
  1. repec:gua:wpaper:ec200905 is not listed on IDEAS
  2. Alexandre Cunha, 2013. "On the relevance of floating exchange rate policies," Economic Theory, Springer, Springer, vol. 53(2), pages 357-382, June.
  3. Paula Hernandez-Verme & Wen-Yao Wang, 2009. "Multiple reserve requirements, exchange rates, sudden stops and equilibrium dynamics in a small open economy," EconoQuantum, Revista de Economia y Negocios, Universidad de Guadalajara, Centro Universitario de Ciencias Economico Administrativas, Departamento de Metodos Cuantitativos y Maestria en Economia., vol. 6(1), pages 71-79, Julio - D.
  4. Mohanty, Biswajit & Bhanumurthy, N.R., 2014. "Exchange rate regimes and inflation: Evidence from India," Working Papers, National Institute of Public Finance and Policy 14/130, National Institute of Public Finance and Policy.
  5. Petreski, Marjan, 2009. "Exchange-rate regime and economic growth: a review of the theoretical and empirical literature," Economics Discussion Papers 2009-31, Kiel Institute for the World Economy.
  6. Petreski, Marjan, 2009. "Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data," Economics Discussion Papers 2009-49, Kiel Institute for the World Economy.
  7. repec:gua:wpaper:em200902 is not listed on IDEAS

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