IDEAS home Printed from
   My bibliography  Save this paper

Foreign Financial Deregulation under Flexible and Fixed Exchange Rates


  • Paul J.J. Welfens

    () (Europäisches Institut für Internationale Wirtschaftsbeziehungen (EIIW))


An enhanced Mundell-Fleming model with domestic and foreign banking deregulation is considered for a small open economy. Deregulation is assumed to influence net capital outflows. It can be shown that under fixed exchange rates, foreign deregulation reduces output and employment and therefore there will be an international resistance to strong deregulation abroad - typically in the US or the UK whose big banking sectors could give an inherent incentive to deregulate. Under flexible exchange rates, banking deregulation abroad raises output and employment so that banking deregulation in the US – or the UK - will face less resistance than under a system of fixed exchange rates; excessive deregulation pressure could emerge in a system of flexible rates. There is a new trilemma. While banking deregulation might bring a national and global output increase in the medium term, the long-run effects could be higher government restructurings cost related to ailing banks in OECD countries. The debate of fixed exchange rates versus flexible exchange rates thus has a new additional aspect, namely the probability of banking deregulation. A key policy implication derived is thus that in a system of flexible exchange rates national and international as well as IMF monitoring of banking regulation quality is important for economic stability and welfare – the IMF’s FSAP and the work of the BIS are quite crucial. BREXIT allows one to expect a wave of deregulation in the UK (plus US); with negative external effects worldwide. New long-run effects are also considered in an enhanced Solow growth model with risk, trade and FDI.

Suggested Citation

  • Paul J.J. Welfens, 2017. "Foreign Financial Deregulation under Flexible and Fixed Exchange Rates," EIIW Discussion paper disbei238, Universitätsbibliothek Wuppertal, University Library.
  • Handle: RePEc:bwu:eiiwdp:disbei238

    Download full text from publisher

    File URL:
    Download Restriction: no

    More about this item


    Banking; Deregulation; Macroeconomics; OECD; Employment;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F00 - International Economics - - General - - - General
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
    • F43 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Economic Growth of Open Economies

    NEP fields

    This paper has been announced in the following NEP Reports:


    Access and download statistics


    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:bwu:eiiwdp:disbei238. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Frank Hoffmann). General contact details of provider: .

    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 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.

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

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.