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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 finacial 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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File URL: http://www.st-andrews.ac.uk/economics/CDMA/papers/cp0902.pdf
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Bibliographic Info

Paper provided by Centre for Dynamic Macroeconomic Analysis in its series CDMA Conference Paper Series with number 0902.

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Date of creation: Aug 2009
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Handle: RePEc:san:cdmacp:0902

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Postal: Department of Economics, University of St. Andrews, Fife KY16 9AL
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Web page: http://www.st-andrews.ac.uk/cdma
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Keywords: Small Open Economy; Incomplete Financial Markets; Discretionary Monetary Policy; Multiple Equilibria.;

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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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