Financial crises and exchange rate policy

Luca Fornaro

Journal of International Economics, 2015, vol. 95, issue 2, 202-215

Abstract: This paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and Fisherian deflation. The goal is to evaluate the performance of alternative exchange rate policies in sudden stop-prone economies. The key element of the analysis is a pecuniary externality arising from frictions in the international credit markets, which creates a trade-off between price and financial stability. The main result is that depreciating the exchange rate during a financial crisis has a positive impact on welfare, because the stimulus provided by a depreciation sustains asset prices, value of collateral, and access to the international credit markets.

Keywords: Financial crises; Monetary policy; Sudden stops; Exchange rate regime; Nominal wage rigidities; Pecuniary externalities (search for similar items in EconPapers)
JEL-codes: E44 E52 F32 F41 G01 (search for similar items in EconPapers)
Date: 2015
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (52)

Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S002219961400141X
Full text for ScienceDirect subscribers only

Related works:
Working Paper: Financial Crises and Exchange Rate Policy (2012)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:95:y:2015:i:2:p:202-215

DOI: 10.1016/j.jinteco.2014.11.009

Access Statistics for this article

Journal of International Economics is currently edited by Gourinchas, Pierre-Olivier and Rodríguez-Clare, Andrés

More articles in Journal of International Economics from Elsevier
Bibliographic data for series maintained by Catherine Liu ().