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Financial crises and exchange rate policy

Luca Fornaro

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper studies exchange rate policy in a small open economy model featuring an occasionally binding collateral constraint and Fisherian deflation. The goal is to evaluate the performance of alternative exchange rate policies in sudden stop-prone economies. The key element of the analysis is a pecuniary externality arising from frictions in the international credit markets, which creates a trade-off between price and financial stability. The main result is that devaluing the exchange rate during a financial crisis has a positive impact on welfare, because the stimulus provided by a devaluation sustains asset prices, the value of collateral, and access to the international credit markets.

Keywords: Financial crises; Monetary Policy; Sudden Stops; Exchange Rate Regime; Nominal Wage Rigidities; Pecuniary Externalities. (search for similar items in EconPapers)
JEL-codes: E44 E52 F32 F34 F41 G01 (search for similar items in EconPapers)
Date: 2014-07, Revised 2014-11
New Economics Papers: this item is included in nep-cba, nep-mac, nep-mon and nep-opm
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (8)

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Related works:
Journal Article: Financial crises and exchange rate policy (2015) Downloads
Working Paper: Financial Crises and Exchange Rate Policy (2012) Downloads
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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:1431

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