Financial openness, financial frictions and optimal monetary policy

Ester Faia and Eleni Iliopulos

Journal of Economic Dynamics and Control, 2011, vol. 35, issue 11, 1976-1996

Abstract: Increasing financial integration challenges the optimality of inward-looking strategies for optimal monetary policy. Those issues are analyzed in an open economy where foreign net lending, and the current account, are determined by a collateral constraint. Durables represent collateral. The current account features persistent imbalances, but can deliver a long run stationary equilibrium. The comparison between floating and managed exchange rate regimes shows that the impossible trinity is reversed: higher financial integration increases the persistence and volatility of the current account and calls for exchange rate stabilization. In this context, the Ramsey plan too prescribes stabilization of the exchange rate, alongside with domestic inflation.

Keywords: Global imbalances; Collateral constraints; Monetary regimes (search for similar items in EconPapers)
JEL-codes: E52 F1 (search for similar items in EconPapers)
Date: 2011
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Citations: View citations in EconPapers (10)

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Working Paper: Financial openness, financial frictions and optimal monetary policy (2011)
Working Paper: Financial openness, financial frictions and optimal monetary policy (2011)
Working Paper: Financial openness, financial frictions and optimal monetary policy (2011)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:dyncon:v:35:y:2011:i:11:p:1976-1996

DOI: 10.1016/j.jedc.2011.06.012

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