Inflation, Growth and Exchange Rate Regimes in Small Open Economies

Paula L. Hernandez-Verme ()
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Paula L. Hernandez-Verme: Texas A&M University

A chapter in Recent Developments on Money and Finance, 2006, pp 93-123 from Springer

Abstract: Summary This paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Endogenously arising volatility may arise independently of the exchange rate regime. Private information — with high rates of domestic inflation — increases the scope for indeterminacy and economic fluctuations.

Keywords: Credit Rationing; Exchange Rate Regime; Small Open Economy; Walrasian Equilibrium; Currency Board (search for similar items in EconPapers)
Date: 2006
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Persistent link: https://EconPapers.repec.org/RePEc:spr:steccp:978-3-540-29500-6_5

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DOI: 10.1007/3-540-29500-3_5

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