Exchange rate regimes, banking and the non-tradable sector |
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Authors: | Enrique Kawamura |
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Institution: | Universidad de San Andrés, Vito Dumas 284, Victoria, Buenos Aires (1644), Argentina |
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Abstract: | This paper presents a small-open-economy, two-good version of the Diamond and Dybvig model with cash constraints to analyze the implications on banking of different exchange rate regimes and monetary policies. I show that fixed exchange rates with a Central Bank providing liquidity in local currency imply Pareto efficiency, with conditions for a run equilibrium stronger than in the literature. In a flexible exchange rate regime, multiple equilibria may not be eliminated. In particular, for very a expansive monetary policy there exists an equilibrium where a fraction of patient consumers purchases dollars in the interim period, which constitutes a partial currency run. A dollarized banking system without international short-run credit may also implement the efficient allocation under certain conditions. |
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Keywords: | Exchange rates Banking Cash-in-advance |
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