Should government smooth exchange rate risk?

Ilan Goldfajn and Marcos Antonio Silveira ()
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Marcos Antonio Silveira: Department of Economics PUC-Rio

No 465, Textos para discussão from Department of Economics PUC-Rio (Brazil)

Abstract: A general equilibrium model is built to explain if there are circumstances in which exchange rate risk smoothing (ERRS) policies may bring a Pareto-improvement for a indebted small open (home) economy. The model shows that this is the case when overpessimistic foreign creditors demand a large spread on the default risk-free world interest rate, whose size can be reduced by ERRS policies and, in addition, market imperfections, such as information asymmetry between foreign investors and domestic debtors, prevent home economy’s residents from internalizing all benefits and costs of the exchange rate risk reallocation into their allocative decisions.

Pages: 38 pages
Date: 2002-10
New Economics Papers: this item is included in nep-cdm, nep-fin, nep-ifn and nep-rmg
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Citations: View citations in EconPapers (5)

Published in the Journal of Development Economics v.69, n.2, p. 393-421, 2002

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Related works:
Journal Article: Should government smooth exchange rate risk? (2002)
Working Paper: Should Government Smooth Exchange Rate Risk? (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:rio:texdis:465

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