Financial stability in small open economy under political uncertainty

Ibrahim Onour

MPRA Paper from University Library of Munich, Germany

Abstract: In this paper we model financial stability in small open economy enduring political uncertainty and operating under dual exchange markets, a free exchange rate applicable to wide range of private capital transactions and controlled exchange rate applicable to some official transactions. The finding in the paper indicate, given that capital outflow is kept at minimal level there exist steady state equilibrium exchange rates. The level of initial official reserves determine the length of time needed for the process to adjust towards a new steady state equilibrium. The lower initial official reserve level is, the longer time is needed to recover from a shock and adjust towards a new equilibrium steady state. When fiscal deficit and declining official reserves force the government to abandon the dual exchange system in favor of floating single exchange rate system, our model predict depreciation of foreign exchange rates is identical to domestic money growth.

Keywords: parallel rate; official rate; Stability; Steady-state. (search for similar items in EconPapers)
JEL-codes: C02 E44 O11 (search for similar items in EconPapers)
Date: 2011-03-02
New Economics Papers: this item is included in nep-pol
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Persistent link: https://EconPapers.repec.org/RePEc:pra:mprapa:29883

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