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Inflation, Growth and Exchange Rate Regimes in Small Open Economies

Authors
Publication Date
Keywords
  • G14 - Information And Market Efficiency
  • Event Studies
  • E31 - Price Level
  • Inflation
  • Deflation
  • E44 - Financial Markets And The Macroeconomy
  • F33 - International Monetary Arrangements And Institutions
  • E32 - Business Fluctuations
  • Cycles
  • E42 - Monetary Systems
  • Standards
  • Regimes
  • Government And The Monetary System
  • Payment Systems
  • G18 - Government Policy And Regulation
  • O16 - Financial Markets
  • Saving And Capital Investment
  • Corporate Finance And Governance
  • F31 - Foreign Exchange
Disciplines
  • Economics

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.

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