Title
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International financial integration, credit frictions and exchange rate regimes
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Author
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Abstract
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This paper studies the stabilisation properties of di¤erent exchange rate policies in a small open economy with cross-border balance sheet interdependence. The model features price and wage rigidities, credit frictions à la Bernanke, Gertler and Gilchrist (1999) both between households and banks and between banks and entrepreneurs, as well as international
nancial linkages à la Ueda (2012). I
nd that, overall, the argument in favor of exible exchange rates holds irrespectively of the degree of
nancial integration. In fact, for all shocks considered, a
xed exchange rate policy delivers larger output losses and higher volatility of real and
nancial variables. Furthermore, my results reveal that the cost of pegging the exchange rate is inversely related to the degree of
nancial integration. Finally, I
nd that the presence of
nancial linkages increases the trade-o¤ between ination and output volatility faced by the central bank of a small open economy. Keywords: Monetary |
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Language
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English
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Source (series)
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Research paper / University of Antwerp, Faculty of Applied Economics ; 2013:015
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Publication
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Antwerp
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Universiteit Antwerpen, Faculty of Applied Economics
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2013
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Volume/pages
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66 p.
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Full text (open access)
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