Inflation, Growth and Exchange Rate Regimes in Small Open Economies

Paula Hernandez-Verme (paulaherver@gmail.com)
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Paula Hernandez-Verme: Department of Economics and Finance, Universidad de Guanajuato

No EC200906, Department of Economics and Finance Working Papers from Universidad de Guanajuato, Department of Economics and Finance

Abstract: This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations.

Keywords: Currency Board; Endogenously Arising Volatility; Fixed exchange rates; Floating exchange rates; Growth; Indeterminacy; Inflation; Multiple Reserve Requirements; Private Information; Stabilization (search for similar items in EconPapers)
JEL-codes: E31 E32 E42 E44 F31 F33 G14 G18 O16 (search for similar items in EconPapers)
Pages: 89 pages
Date: 2009-07
New Economics Papers: this item is included in nep-cba, nep-fdg, nep-ifn, nep-mac and nep-mon
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