Destabilizing Balance Sheet Effects in the New Consensus Model
Emiliano Libman ()
Eastern Economic Journal, 2019, vol. 45, issue 4, No 5, 590-611
Abstract This paper proposes a simple modification of an otherwise standard New Consensus open economy model. We include an endogenous risk premium to show that a Taylor Rule that satisfies the Taylor Principle may lead to instability if exchange rate depreciations worsen the balance sheet of firms, exerting a negative effect on output and employment. Thus, the adoption of Inflation Targeting and a flexible exchange rate regime introduces destabilizing forces in economies that are exposed to liability dollarization, and this helps to rationalize central bank interventions in the foreign exchange market to avoid large exchange rate fluctuations.
Keywords: Inflation targeting; Balance sheet effects; Liability dollarization; Contractionary devaluations; Financial accelerator (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 (search for similar items in EconPapers)
References: View references in EconPapers View complete reference list from CitEc
Citations: Track citations by RSS feed
Downloads: (external link)
http://link.springer.com/10.1057/s41302-019-00146-3 Abstract (text/html)
Access to full text is restricted to subscribers.
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
Persistent link: https://EconPapers.repec.org/RePEc:pal:easeco:v:45:y:2019:i:4:d:10.1057_s41302-019-00146-3
Ordering information: This journal article can be ordered from
Access Statistics for this article
Eastern Economic Journal is currently edited by Allan Zebedee and Cynthia Bansak
More articles in Eastern Economic Journal from Palgrave Macmillan, Eastern Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by Sonal Shukla () and Springer Nature Abstracting and Indexing ().