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Exchange Rate Targeting in the Presence of Foreign Debt Obligations

James Staveley-O'Carroll and Olena Staveley-O'Carroll ()

No 1604, Working Papers from College of the Holy Cross, Department of Economics

Abstract: We study the impact of foreign debt on the trade-off between the three open economy objectives of a central bank - international risk sharing, the need to facilitate expenditure-switching, and the incentive to tilt international prices to lower the labor effort of domestic households - in a two-country DSGE model with incomplete asset markets and deviations from the purchasing power parity. We fi?nd that at low debt levels, a Taylor rule outperforms simple targeting rules. However, the central bank can improve welfare by up to 0.25 percent of consumption via an exchange rate peg when debt-to-GDP ratio reaches 100 percent.

Keywords: international risk sharing; foreign debt; exchange rate policy (search for similar items in EconPapers)
JEL-codes: E52 F32 F41 (search for similar items in EconPapers)
Pages: 43 pages
Date: 2016-07
New Economics Papers: this item is included in nep-cse, nep-dge, nep-mac, nep-mon and nep-opm
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Citations: View citations in EconPapers (2) Track citations by RSS feed

Published in Journal of Macroeconomics, Volume 56, June 2018, Page 113-134.

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http://web.holycross.edu/RePEc/hcx/HC1604_OCarroll_OCarroll_Peg.pdf (application/pdf)

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Journal Article: Exchange rate targeting in the presence of foreign debt obligations (2018) Downloads
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