Financial Frictions and the Choice of Exchange Rate Regimes

Abstract

This paper provides a quantitative assessment of the role of …nancial frictions in the choice of exchange rate regimes. I use a two country model with sticky prices to compare di¤erent exchange rate arrangements. I simulate the model without and with borrowing constraints on investment, under monetary policy and technology shocks. I …nd that the stabilization properties of ‡oating exchange rate regimes in face of foreign shocks are enhanced relative to …xed exchange rates in presence of credit frictions. In presence of symmetric and correlated shocks …xed exchange rates regimes can perform better than ‡oating. This analysis can have important policy implications for accession countries joining the ERM II system and with high degrees of credit frictions.JEL Classi…cation Numbers: E3, E42, E44, E52, F41.

Monetary Policy in a Non‐representative Agent Economy: A Survey

“…However, the marginal gain of such responses vanishes with a growing anti-inflationary stance. In a two-country setup, Faia (2010) finds that the presence of credit frictions strengthens the case for floating exchange rate regimes in economies facing external shocks. Using a similar model, Gilchrist et al (2002) point out that the enhanced desirability of multiple currencies is not so obvious as it depends on shock asymmetry as well as financial integration and cross-country heterogeneity of financial structures.…”

“…However, the marginal gain of such responses vanishes with a growing anti‐inflationary stance. In a two‐country setup, Faia () finds that the presence of credit frictions strengthens the case for floating exchange rate regimes in economies facing external shocks. Using a similar model, Gilchrist et al .…”

Financial integration and business cycles in a small open economy

“…The measure was recently employed by Faia (2010) and represents a fraction of steady state consumption that households would be willing to give up in order to be indifferent between a constant sequence of consumption and 16 See, among others, Backus et al (1994). 17 The autocorrelations of the simulated variables decrease for higher lags of the variables.…”

A Magyarországra áramló külföldi működő tőke ciklikus viselkedése

“…Az elméleti modellek egy része prociklikus kapcsolatot sugall. Például a Bernanke-Gertler-Gilchrist [1999] által leírt pénzügyi akcelerátor modell, illetve annak különböző, nyitott gazdaságokra kiterjesztett verziói -például Faia [2010] -is a beruházás prociklikus viselkedését állapítják meg, amelyet jellemzően a gazdasági visszaesések során megnövekvő hitelfelvételi költségekkel magyaráznak. Cavallari [2010] DSGE-(dynamic stochastic general equilibrium -dinamikus, sztochasztikus általános egyensúly) modell segítségével vizsgálja a termelékenység ingadozása és a monetáris politika hatását arra a döntésre vonatkozóan, hogy a vállalatok hazai vagy külföldi piacra lépjenek.…”