Discretionary policy in a small open economy: exchange rate regimes and multiple equilibria

Himmels, C. and Kirsanova, T. (2018) Discretionary policy in a small open economy: exchange rate regimes and multiple equilibria. Journal of Macroeconomics, 56, pp. 53-64. (doi:10.1016/j.jmacro.2018.01.001)

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Abstract

We study a Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We analyze inflation and exchange rate targeting regimes and demonstrate that both cases may result in multiple equilibria. These equilibria feature qualitatively and quantitatively different economic dynamics following the same shock. The model can help us to understand sudden changes in the interest rate and exchange rate volatility in ‘tranquil’ and ‘volatile’ times under a fully credible ‘soft peg’ of the nominal exchange rate.

Item Type:Articles
Status:Published
Refereed:Yes
Glasgow Author(s) Enlighten ID:Kirsanova, Professor Tatiana
Authors: Himmels, C., and Kirsanova, T.
College/School:College of Social Sciences > Adam Smith Business School > Economics
Journal Name:Journal of Macroeconomics
Publisher:Elsevier
ISSN:0164-0704
ISSN (Online):1873-152X
Published Online:05 January 2018
Copyright Holders:Copyright © 2018 Elsevier Inc.
First Published:First published in Journal of Macroeconomics 56:53-64
Publisher Policy:Reproduced in accordance with the publisher copyright policy

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