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Inflation, Growth and Exchange Rate Regimes in Small Open Economies

In: Recent Developments on Money and Finance

Author

Listed:
  • Paula L. Hernandez-Verme

    (Texas A&M University)

Abstract

Summary This 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. Endogenously arising volatility may arise independently of the exchange rate regime. Private information — with high rates of domestic inflation — increases the scope for indeterminacy and economic fluctuations.

Suggested Citation

  • Paula L. Hernandez-Verme, 2006. "Inflation, Growth and Exchange Rate Regimes in Small Open Economies," Studies in Economic Theory, in: Charalambos D. Aliprantis & Nicholas C. Yannelis & Gabriele Camera (ed.), Recent Developments on Money and Finance, pages 93-123, Springer.
    • Handle: RePEc:spr:steccp:978-3-540-29500-6_5
    DOI: 10.1007/3-540-29500-3_5
    as

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