The Interest Rate — Exchange Rate Nexus: Exchange Rate Regimes and Policy Equilibria

Christoph Himmels and Tatiana Kirsanova

CDMA Conference Paper Series from Centre for Dynamic Macroeconomic Analysis

Abstract: We study a credible Markov-perfect monetary policy in an open New Keynesian economy with incomplete finacial markets. We demonstrate the existence of two discretionary equilibria. Following a shock the economy can be stabilised either 'quickly' or 'slow', both dynamic paths satisfy conditions of optimality and time-consistency. The model can help us to understand sudden change of the interest rate and exchange rate volatility in 'tranquil' and 'volatile' regimes even under a fully credible 'soft peg' of the nominal exchange rate in developing countries.

Keywords: Small Open Economy; Incomplete Financial Markets; Discretionary Monetary Policy; Multiple Equilibria. (search for similar items in EconPapers)
JEL-codes: C61 E31 E52 E58 E61 F4 (search for similar items in EconPapers)
Date: 2009-08
New Economics Papers: this item is included in nep-cba, nep-ifn and nep-mon
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria (2012)
Working Paper: The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:san:cdmacp:0902

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