Himmels, C. and Kirsanova, T. (2009) The Interest Rate - Exchange Rate Nexus: Exchange Rate Regimes and Policy Equilibria. Working Paper. Social Science Research Network. (doi: 10.2139/ssrn.1498447).
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Publisher's URL: http://dx.doi.org/10.2139/ssrn.1498447
Abstract
We study a credible Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We demonstrate the existence of two discretionary equilibria. Following a shock the economy can be stabilised either 'quickly' or 'slow', both dynamic paths satisfy conditions of optimality and time-consistency. The model can help us to understand sudden change of the interest rate and exchange rate volatility in 'tranquil' and 'volatile' regimes even under a fully credible 'soft peg' of the nominal exchange rate in developing countries.
| Item Type: | Research Reports or Papers (Working Paper) |
|---|---|
| Additional Information: | Published online |
| Keywords: | Small open economy, incomplete financial markets, discretionary monetary policy, multiple equilibria |
| Status: | Published |
| Glasgow Author(s) Enlighten ID: | Kirsanova, Professor Tatiana and Himmels, Mr Christoph |
| Authors: | Himmels, C., and Kirsanova, T. |
| College/School: | College of Social Sciences > Adam Smith Business School > Economics |
| Journal Name: | SSRN eLibrary |
| Publisher: | Social Science Research Network |
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