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Exchange Rate Regimes, Monetary Policy and Banking Performance in Economies with Cash Constraints. Chang and Velasco Revisited

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  • Enrique L. Kawamura

    () (Department of Economics, Universidad de San Andres)

Abstract

This paper analyzes a two-good version of the Diamond and Dybvig model in a small open economy. This structure is used to analyze the interaction between banks as liquidity insurers, real exchange rates and monetary policies. It is shown that fixed exchange rates with a Central Bank providing liquidity in pesos implements the efficient allocation. The conditions for a run equilibrium in this system are stronger than in the literature. In a flexible exchange rate regime, multiple equilibria cannot be eliminated. In particular, there is an equilibrium where a fraction of patient consumers purchases dollars in the interim period. This can be interpreted as a partial currency run event. A dollarized banking system may also implement the efficient allocation under some conditions.

Suggested Citation

  • Enrique L. Kawamura, 2004. "Exchange Rate Regimes, Monetary Policy and Banking Performance in Economies with Cash Constraints. Chang and Velasco Revisited," Working Papers 66, Universidad de San Andres, Departamento de Economia, revised Jan 2004.
  • Handle: RePEc:sad:wpaper:66
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    File URL: ftp://webacademicos.udesa.edu.ar/pub/econ/doc66.pdf
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    References listed on IDEAS

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    1. Stephen D. Williamson, 1998. "Discount Window Lending and Deposit Insurance," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 1(1), pages 246-275, January.
    2. Douglas W. Diamond & Philip H. Dybvig, 2000. "Bank runs, deposit insurance, and liquidity," Quarterly Review, Federal Reserve Bank of Minneapolis, issue Win, pages 14-23.
    3. Kiyotaki, Nobuhiro & Wright, Randall, 1989. "On Money as a Medium of Exchange," Journal of Political Economy, University of Chicago Press, vol. 97(4), pages 927-954, August.
    4. Magill, M. & Quinzii, M., 1992. "Real effects of money in general equilibrium," Journal of Mathematical Economics, Elsevier, vol. 21(4), pages 301-342.
    5. Fuerst, Timothy S., 1992. "Liquidity, loanable funds, and real activity," Journal of Monetary Economics, Elsevier, vol. 29(1), pages 3-24, February.
    6. Schreft, Stacey L. & Smith, Bruce D., 1997. "Money, Banking, and Capital Formation," Journal of Economic Theory, Elsevier, vol. 73(1), pages 157-182, March.
    7. Lucas, Robert Jr., 1990. "Liquidity and interest rates," Journal of Economic Theory, Elsevier, vol. 50(2), pages 237-264, April.
    8. Lucas, Robert E, Jr, 1980. "Equilibrium in a Pure Currency Economy," Economic Inquiry, Western Economic Association International, vol. 18(2), pages 203-220, April.
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    Cited by:

    1. Roberto Cortes Conde, 2008. "Spanish America Colonial Patterns: The Rio de La Plata," Working Papers 96, Universidad de San Andres, Departamento de Economia, revised Mar 2008.

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