Inflation, Growth and Exchange Rate Regimes in Small Open Economies

Hernandez-Verme, Paula (2002): Inflation, Growth and Exchange Rate Regimes in Small Open Economies.

Abstract

Summary. This is an extended working paper version of the paper that appeared in Economic Theory. It paper compares the merits of alternative exchange rate regimes in small open economies where financial intermediaries perform a real allocative function, there are multiple reserve requirements, and credit market frictions may or may not cause credit rationing. Under floating exchange rates, raising domestic inflation can increase production if credit is rationed. However, there exist inflation thresholds: increasing inflation beyond the threshold level will reduce domestic output. Instability, indeterminacy of dynamic equilibria and economic fluctuations may arise independently of the exchange rate regime. Private information –with high rates of domestic inflation- increases the scope for indeterminacy and economic fluctuations.

• Item Type: MPRA Paper
• Language: English
• Keywords: Currency Board; Endogenously Arising Volatility; Fixed exchange rates; Floating exchange rates; Growth; Indeterminacy; Inflation; Multiple Reserve Requirements; Private Information; Stabilization
• Subjects: G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy; F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions; E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E32 - Business Fluctuations ; Cycles; E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems; G - Financial Economics > G1 - General Financial Markets > G18 - Government Policy and Regulation; O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance; F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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