 Optimal exchange-rate policy under collateral constraints and wage rigidityJournal of International Economics, 2021, vol. 131, issue C Abstract: This paper studies the conduct of monetary policy in economies with currency mismatch. To this end, I build a model that embeds financial frictions from households' collateralized borrowing in foreign currency into an open-economy Keynesian framework. The monetary authority faces a trade-off between traditional unemployment stabilization gains from currency depreciation and its costs in terms of generating debt deflation and tightening households' ability to borrow. The optimal policy under this trade-off results in macroeconomic patterns aligned with those observed in emerging-markets data, including large currency depreciation and consumption adjustments during crises. The optimal degree of “fear of floating” depends on the level of indebtedness with which the economy arrives to a crisis and on the type of experienced by the economy. Keywords: Monetary policy; Exchange rates; Debt deflation; Sudden stops; Currency mismatch; Unemployment (search for similar items in EconPapers) Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:131:y:2021:i:c:s0022199621000556 DOI: 10.1016/j.jinteco.2021.103478 Access Statistics for this article Journal of International Economics is currently edited by Martin Uribe and Costas Arkolakis More articles in Journal of International Economics from Elsevier |
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