Financial market segmentation and choice of exchange rate regimes

Vipul Mathur and Chetan Subramanian

Economics Letters, 2016, vol. 142, issue C, 78-82

Abstract: We study the choice of exchange rate regime in a small open economy with segmented asset markets subjected to financial sector shocks. We show that the state-contingent optimal policy facilitates risk sharing between asset market participants and non-participants, and is countercyclical. Our results establish that contrary to existing literature, flexible exchange rates mimic optimal policy and welfare dominates fixed exchange rates.

Keywords: Exchange rates; Financial shocks; Segmented asset markets; Optimal monetary policy (search for similar items in EconPapers)
JEL-codes: E52 F41 G12 G15 (search for similar items in EconPapers)
Date: 2016
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Persistent link: https://EconPapers.repec.org/RePEc:eee:ecolet:v:142:y:2016:i:c:p:78-82

DOI: 10.1016/j.econlet.2016.02.035

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