Collapsing Exchange Rate Regime Under Optimal Monetary Control |
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Authors: | N M Hung & N V Quyen |
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Institution: | UniversitéLavail, Canada,;UniversitéOttawa, Canada |
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Abstract: | In this paper, we analyse the problem of optimal domestic credit expansion for a small open economy. We show that (i) the transition from the fixed to the flexible exchange rate regime proceeds smoothly with no speculative attack on the central bank's foreign reserves; (ii) once the exchange rate has floated, it will never be optimal to repeg it afterward; (iii) even under uncertainty, there will not be any speculative attack; however, the optimal rate of credit expansion jumps discontinuously at the date of complete depletion of the known stock of foreign reserves. |
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