Financial Market Integration and Exchange Rate Policy

Liliana Rojas-Suarez and Donald Mathieson

No 1990/002, IMF Working Papers from International Monetary Fund

Abstract: This paper examines how a country’s exchange rate policy should be adjusted when the degree of integration between domestic and external financial markets increases as a result of both domestic financial liberalization and the relaxation of capital controls. As the financial structure is opened and liberalized, the optimal scale of exchange market intervention changes as the relative importance of different domestic and foreign shocks for output and price stability is altered. Nonetheless, the response of the optimal degree of intervention to increases in the variances of the various domestic and foreign shocks is similar across all financial structures.

Keywords: WP; credit rationing; monetary base; excess demand; financial system; risk premium; exchange market intervention; loan rate; intervention strategy; interest rate shock; goods market; intervention parameter; optimal exchange market intervention; exchange rate appreciation; Exchange rate policy; Exchange rates; Credit; Capital controls; Exchange rate arrangements; North America; Northern Europe (search for similar items in EconPapers)
Pages: 66
Date: 1990-01-01
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