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Currency mismatch, openness and exchange rate regime choice

  • Magud, Nicolas E.
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    The paper analyzes the choice of an exchange rate regime for a small open economy indebted in foreign-currency, incorporating the financial accelerator. Conventional wisdom suggests that floating regimes should insulate the economy from real shocks. I show that this result depends on the degree of openness of the economy and foreign-currency indebtedness and, in fact, does not hold for relatively closed economies. The transmission mechanism relies on non-linearities in the impact of unanticipated real price changes on the external finance premium in the spirit of Fisher (1933).

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    Article provided by Elsevier in its journal Journal of Macroeconomics.

    Volume (Year): 32 (2010)
    Issue (Month): 1 (March)
    Pages: 68-89

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    Handle: RePEc:eee:jmacro:v:32:y:2010:i:1:p:68-89
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