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Exchange Rate Regimes, Monetary Policy and Banking Performance in Economies with Cash Constraints. Chang and Velasco Revisited

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Author Info

  • Enrique L. Kawamura

    ()
    (Department of Economics, Universidad de San Andres)

Abstract

This paper analyzes a two-good version of the Diamond and Dybvig model in a small open economy. This structure is used to analyze the interaction between banks as liquidity insurers, real exchange rates and monetary policies. It is shown that fixed exchange rates with a Central Bank providing liquidity in pesos implements the efficient allocation. The conditions for a run equilibrium in this system are stronger than in the literature. In a flexible exchange rate regime, multiple equilibria cannot be eliminated. In particular, there is an equilibrium where a fraction of patient consumers purchases dollars in the interim period. This can be interpreted as a partial currency run event. A dollarized banking system may also implement the efficient allocation under some conditions.

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File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc66.pdf
File Function: First version, 2004
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Bibliographic Info

Paper provided by Universidad de San Andres, Departamento de Economia in its series Working Papers with number 66.

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Length: 55 pages
Date of creation: Jan 2004
Date of revision: Jan 2004
Handle: RePEc:sad:wpaper:66

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Related research

Keywords: exchange rate regimes; monetary policy; banking performance; cash constraints;

References

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  1. Williamson, S.D., 1995. "Discount Window Lending and Deposit Insurance," Working Papers 95-01, University of Iowa, Department of Economics.
  2. Magill, M. & Quinzii, M., 1992. "Real effects of money in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 21(4), pages 301-342.
  3. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
  4. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-20, April.
  5. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
  6. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
  7. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
  8. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-54, August.
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Cited by:
  1. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.

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