Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
5099579 | Journal of Economic Dynamics and Control | 2007 | 30 Pages |
Abstract
We evaluate the welfare implications of fixed and flexible exchange rate regimes in a small open-economy model that incorporates the financial accelerator coupled with liability dollarization. We solve the model up to a second-order approximation which allows us to rigorously address the relationship between uncertainty and welfare. We identify leverage and debt-to-GDP ratios above which an exchange rate peg is welfare superior to a flexible exchange rate regime. The results indicate that emerging market countries with even moderate levels of foreign currency-denominated debt may find it beneficial to stabilize their exchange rates.
Keywords
Related Topics
Physical Sciences and Engineering
Mathematics
Control and Optimization
Authors
Selim ElekdaÄ, Ivan Tchakarov,