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 (53)

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Related works:
Working Paper: Financial crises and exchange rate policy (2014)
Working Paper: Financial Crises and Exchange Rate Policy (2012)
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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

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