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

Enrique Lucio Kawamura

No 66, Working Papers from Universidad de San Andres, Departamento de Economia

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.

Keywords: exchange rate regimes; monetary policy; banking performance; cash constraints (search for similar items in EconPapers)
Date: 2004-01, Revised 2004-01
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ftp://webacademicos.udesa.edu.ar/pub/econ/doc66.pdf First version, 2004 (application/pdf)

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Persistent link: http://EconPapers.repec.org/RePEc:sad:wpaper:66

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