Economics at your fingertips  

Un Enfoque Monetario de los Efectos Sobre Precios y Tasas de Interés del Tipo de Cambio Fijo

A Monetary Approach about the Effects of a Fixed Exchange Rate Regime on Prices and Interest Rates

Jorge Leon, Evelyn Muñoz and Róger Madrigal ()

MPRA Paper from University Library of Munich, Germany

Abstract: The purpose of this document is to discuss, from the monetary point of view, the long run effects of a fixed exchange rate regime on prices and interest rates. We develop a partial equilibrium model for the monetary sector of a small open economy in which we link fixed exchange rate to the process of money creation and inflation. Using this model, we compare two monetary policy scenarios. The first one assumes that the central bank is active and by open market operations tries to keep inflation under control; the other assumes that the central bank is passive and does not sterilize the foreign capital inflows. Those two scenarios allow us to reach at some analytical results about the long-term effects of the pegged exchange rate regime on the inflation rate. Next, we “parameterize” the model using the Costa Rican data and perform a simulation exercise. As a result, we get some numerical magnitudes of the costs of keeping the exchange rate fixed long time, expressed in terms of inflation and interest rates prevailing in the economy. Based on the simulation exercise, the model asserts that after 10 years of keeping the exchange rate pegged, the capacity of the monetary policy to achieve inflation rates below five percent has been eroded. Therefore, for the monetary policy to regain its active role, that is to be able to curb inflation, it is necessary that the exchange rate regime does not generate monetary disequilibria.

Keywords: Tipo de Cambio Fijo; Inflación; Tasa de Interés; Precios (search for similar items in EconPapers)
JEL-codes: C2 E5 (search for similar items in EconPapers)
Date: 2002, Revised 2002
References: View complete reference list from CitEc
Citations: Track citations by RSS feed

Downloads: (external link) original version (application/pdf)

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link:

Access Statistics for this paper

More papers in MPRA Paper from University Library of Munich, Germany Ludwigstraße 33, D-80539 Munich, Germany. Contact information at EDIRC.
Bibliographic data for series maintained by Joachim Winter ().

Page updated 2023-03-27
Handle: RePEc:pra:mprapa:44525