Economics at your fingertips  

Endogenous Risk Premium, Inflation Targets and Flexible Exchange Rate: Dynamic Implications of the Bresser-Nakano Hypothesis for a Small Open Economy

José Luís Oreiro ()

Brazilian Journal of Political Economy, 2002, vol. 22, issue 3, 491-507

Abstract: The objective of this article is to analyze the implications of Bresser-Nakano hypothesis, that risk-premium is positive related to domestic rate of interest, over time paths of nominal interest rate and nominal exchange rate in a small open economy whose regime of economic policy is characterized by flexible exchange rate, inflation targeting and short run capital mobility. In the theoretical framework developed in the article, we are able to shown that, in the case of a strong positive feedback of nominal interest rate over risk-premium, (i) there are multiple time paths of nominal interest rate and nominal exchange rate; (ii) all such paths are compatible with some degree of price stability and (iii) some of these paths, however, are related to an increase in current account deficit and/or a continuous increase in fiscal deficit. The logical conclusion of these results is that the achievement of current account and fiscal equilibrium can only be obtained by a change in the regime of economic policy. JEL Classification: E4; E6; F32.

Keywords: Risk premium; interest rate trap; Bresser-Nakano hypothesis (search for similar items in EconPapers)
Date: 2002
References: Add references at CitEc
Citations: Track citations by RSS feed

Downloads: (external link) ... rticle/view/947/2155 (application/pdf)

Related works:
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:

Access Statistics for this article

More articles in Brazilian Journal of Political Economy from Center of Political Economy
Bibliographic data for series maintained by Brazilian Journal of Political Economy (Brazil) ().

Page updated 2022-09-21
Handle: RePEc:ekm:repojs:v:22:y:2002:i:3:p:491-507:id:947