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Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy

  • Paula Hernandez-Verme

    ()

    (Department of Economics and Finance, Universidad de Guanajuato)

  • Wen-Yao Wang

    (Texas A&M University at Galveston)

Registered author(s):

    We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.

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    File URL: http://economia.ugto.org/WorkingPapers/EC200905.pdf
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    Paper provided by Universidad de Guanajuato, Department of Economics and Finance in its series Department of Economics and Finance Working Papers with number EC200905.

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    Length: 50 pages
    Date of creation: Jul 2009
    Date of revision:
    Handle: RePEc:gua:wpaper:ec200905
    Contact details of provider: Postal:
    UCEA-Campus Marfil, Fracc. I, El Establo, Guanajuato GTO 36250

    Phone: [+52 473] 735 2925 x-2925
    Fax: [+52 473] 735 2925 x-2925
    Web page: http://economia.ugto.org/
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    1. Hernandez-Verme, Paula, 2002. "Inflation, Growth and Exchange Rate Regimes in Small Open Economies," MPRA Paper 16699, University Library of Munich, Germany, revised Aug 2009.
    2. Valerie R. Bencivenga & Elisabeth Huybens & Bruce D. Smith, 2002. "What to stabilize in the open economy," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 43(4), pages 1289-1307, November.
    3. Diamond, Douglas W & Dybvig, Philip H, 1983. "Bank Runs, Deposit Insurance, and Liquidity," Journal of Political Economy, University of Chicago Press, vol. 91(3), pages 401-19, June.
    4. Frankel, Jeffrey & Schmukler, Sergio L. & Serven, Luis, 2004. "Global transmission of interest rates: monetary independence and currency regime," Journal of International Money and Finance, Elsevier, vol. 23(5), pages 701-733, September.
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