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Automatic Stabilizer Feature of Fixed Exchange Rate Regimes in Emerging Markets

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  • Uluc Aysun

    (University of Connecticut)

Abstract

This paper shows that countries characterized by a financial accelerator mechanism may reverse the usual finding of the literature -- flexible exchange rate regimes do a worse job of insulating open economies from external shocks. I obtain this result with a calibrated small open economy model that endogenizes foreign interest rates by linking them to the banking sector's foreign currency leverage. This relationship renders exchange rate policy more important compared to the usual exogeneity assumption. I find empirical support for this prediction using the Local Projections method. Finally, 2nd order approximation to the model finds larger welfare losses under flexible exchange rate regimes.

Suggested Citation

  • Uluc Aysun, 2006. "Automatic Stabilizer Feature of Fixed Exchange Rate Regimes in Emerging Markets," Working papers 2006-27, University of Connecticut, Department of Economics, revised Aug 2008.
    • Handle: RePEc:uct:uconnp:2006-27
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    References listed on IDEAS

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    4. Chang, R. & Velasco, A., 1998. "Financial Crises in Emerging Markets: A Canonical Model," Working Papers 98-21, C.V. Starr Center for Applied Economics, New York University.
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    10. Ivan Tchakarov & Paul Bergin, 2003. "Does Exchange Rate Risk Matter for Welfare?," Computing in Economics and Finance 2003 61, Society for Computational Economics.
    11. Anders Bergvall, 2005. "Exchange rate regimes and macroeconomic stability: the case of Sweden," Oxford Economic Papers, Oxford University Press, vol. 57(3), pages 422-446, July.
    12. Giancarlo Corsetti & Paolo Pesenti & Nouriel Roubini, 2001. "Fundamental Determinants of the Asian Crisis: The Role of Financial Fragility and External Imbalances," NBER Chapters, in: Regional and Global Capital Flows: Macroeconomic Causes and Consequences, pages 11-41, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Aysun, Uluc & Honig, Adam, 2011. "Bankruptcy costs, liability dollarization, and vulnerability to sudden stops," Journal of Development Economics, Elsevier, vol. 95(2), pages 201-211, July.
    2. Uluc Aysun & Ryan Brady & Adam Honig, 2011. "Financial Frictions and the Credit Channel of Monetary Transmission," Working Papers 2011-03, University of Central Florida, Department of Economics.
    3. Frederik Kunze, 2020. "Predicting exchange rates in Asia: New insights on the accuracy of survey forecasts," Journal of Forecasting, John Wiley & Sons, Ltd., vol. 39(2), pages 313-333, March.

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    More about this item

    Keywords

    accelerator; balance sheets; welfare; EMBI;
    All these keywords.

    JEL classification:

    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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