IDEAS home Printed from https://ideas.repec.org/a/spr/joecth/v24y2004i4p811-837.html
   My bibliography  Save this article

Domestic financial market frictions, unrestricted international capital flows, and crises in small open economies

Author

Listed:
  • Gaetano Antinolfi
  • Elisabeth Huybens

Abstract

We present an example of a small open economy where small increases in the world interest rate may induce a sharp decline in output and a precipitous depreciation of the exchange rate. Due to a costly state verification problem in domestic credit markets, combined with unrestricted international capital flows, our economy generates two long-run equilibria, one with low GDP and a relatively depreciated real exchange rate (RER), and one with high GDP and a relatively appreciated RER. The first is always a saddle, while the second may be a sink or a source, depending on the level of the world interest rate. A “crisis” is identified with the economy switching from an equilibrium path approaching the high-output steady state to the saddlepath approaching the low-output steady state. In Mexico’s recent history, periods of growth associated with appreciation of the RER have alternated with periods of sharp contraction and depreciation of the RER. Our economy displays such behavior in response to changes in the world interest rate. Copyright Springer-Verlag Berlin/Heidelberg 2004

Suggested Citation

  • Gaetano Antinolfi & Elisabeth Huybens, 2004. "Domestic financial market frictions, unrestricted international capital flows, and crises in small open economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(4), pages 811-837, November.
    • Handle: RePEc:spr:joecth:v:24:y:2004:i:4:p:811-837
    DOI: 10.1007/s00199-002-0324-5
    as

    Download full text from publisher

    File URL: http://hdl.handle.net/10.1007/s00199-002-0324-5
    Download Restriction: Access to full text is restricted to subscribers.
    File URL: https://libkey.io/10.1007/s00199-002-0324-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    As the access to this document is restricted, you may want to search for a different version of it.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Marco Del Negro & Francesc Obiols-Homs, 2001. "Has monetary policy been so bad that it is better to get rid of it? The case of Mexico," Proceedings, Federal Reserve Bank of Cleveland, pages 404-439.
    2. Stefan Krasa & Tridib Sharma & Anne Villamil, 2008. "Bankruptcy and firm finance," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 36(2), pages 239-266, August.

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:spr:joecth:v:24:y:2004:i:4:p:811-837. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no bibliographic references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Sonal Shukla or Springer Nature Abstracting and Indexing (email available below). General contact details of provider: http://www.springer.com .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.