Economics at your fingertips  

Exchange Rate Adjustment in Financial Crises

Michael Devereux () and Changhua Yu

IMF Economic Review, 2017, vol. 65, issue 3, 528-562

Abstract: Abstract This paper studies the positive and normative effects of alternative monetary and exchange rate polices in a small open economy model subject to occasional “sudden stops” associated with binding borrowing constraints. Borrowing constraints in the model depend on endogenous movements in asset prices. We find that in normal times, there is little difference between alternative exchange rate policies. But during a crisis, macroeconomic outcomes are far worse under a pegged exchange rate regime. Under some shock configurations, crises may be less frequent under a pegged exchange rate regime, but the worse performance during a crisis leads the pegged exchange regime to be inferior to the floating regimes. Finally, we show that in the presence of pecuniary externalities in asset prices, there may be a case for a fiscal authority to subsidize capital inflows at a constant rate. But the benefits of capital inflow subsidies are much weaker under pegged exchange rates.

Keywords: E44; E52; F33; F38; F41 (search for similar items in EconPapers)
Date: 2017
References: View references in EconPapers View complete reference list from CitEc
Citations View citations in EconPapers (1) Track citations by RSS feed

Downloads: (external link) Abstract (text/html)
Access to full text is restricted to subscribers.

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:

Ordering information: This journal article can be ordered from
http://www.springer. ... cs/journal/41308/PS2

Access Statistics for this article

More articles in IMF Economic Review from Palgrave Macmillan, International Monetary Fund
Bibliographic data for series maintained by Sonal Shukla ().

Page updated 2018-09-29
Handle: RePEc:pal:imfecr:v:65:y:2017:i:3:d:10.1057_s41308-017-0033-5