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Un Enfoque Monetario de los Efectos Sobre Precios y Tasas de Interés del Tipo de Cambio Fijo
[A Monetary Approach about the Effects of a Fixed Exchange Rate Regime on Prices and Interest Rates]

Author

Listed:
  • Leon, Jorge
  • Muñoz, Evelyn
  • Madrigal, Roger

Abstract

The purpose of this document is to discuss, from the monetary point of view, the long run effects of a fixed exchange rate regime on prices and interest rates. We develop a partial equilibrium model for the monetary sector of a small open economy in which we link fixed exchange rate to the process of money creation and inflation. Using this model, we compare two monetary policy scenarios. The first one assumes that the central bank is active and by open market operations tries to keep inflation under control; the other assumes that the central bank is passive and does not sterilize the foreign capital inflows. Those two scenarios allow us to reach at some analytical results about the long-term effects of the pegged exchange rate regime on the inflation rate. Next, we “parameterize” the model using the Costa Rican data and perform a simulation exercise. As a result, we get some numerical magnitudes of the costs of keeping the exchange rate fixed long time, expressed in terms of inflation and interest rates prevailing in the economy. Based on the simulation exercise, the model asserts that after 10 years of keeping the exchange rate pegged, the capacity of the monetary policy to achieve inflation rates below five percent has been eroded. Therefore, for the monetary policy to regain its active role, that is to be able to curb inflation, it is necessary that the exchange rate regime does not generate monetary disequilibria.

Suggested Citation

  • Leon, Jorge & Muñoz, Evelyn & Madrigal, Roger, 2002. "Un Enfoque Monetario de los Efectos Sobre Precios y Tasas de Interés del Tipo de Cambio Fijo [A Monetary Approach about the Effects of a Fixed Exchange Rate Regime on Prices and Interest Rates]," MPRA Paper 44525, University Library of Munich, Germany, revised 2002.
  • Handle: RePEc:pra:mprapa:44525
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    More about this item

    Keywords

    Tipo de Cambio Fijo; Inflación; Tasa de Interés; Precios;
    All these keywords.

    JEL classification:

    • C2 - Mathematical and Quantitative Methods - - Single Equation Models; Single Variables
    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit

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