The Interest Rate - Exchange Rate Nexus: Exchange Rate Regimes and Policy Equilibria

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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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
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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