The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria

Christoph Himmels and Tatiana Kirsanova

No 904, Discussion Papers from University of Exeter, Department of Economics

Abstract: We study a credible Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We demonstrate the existence of two discretionary equilibria. Following a shock the economy can be stabilised either 'quickly' or 'slow', both dynamic paths satisfy conditions of optimality and time-consistency. The model can help us to understand sudden change of the interest rate and exchange rate volatility in 'tranquil' and 'volatile' regimes even under a fully credible 'soft peg' of the nominal exchange rate in developing countries.

Keywords: Small open economy; Incomplete ?nancial markets; Discretionary Monetary policy; Multiple Equilibria (search for similar items in EconPapers)
JEL-codes: C61 E31 E52 E58 E61 F4 (search for similar items in EconPapers)
Date: 2009
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Citations: View citations in EconPapers (1)

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Related works:
Working Paper: The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria (2012)
Working Paper: The Interest Rate — Exchange Rate Nexus: Exchange Rate Regimes and Policy Equilibria (2009)
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Persistent link: https://EconPapers.repec.org/RePEc:exe:wpaper:0904

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