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Working Paper
Optimal fear of floating: the role of currency mismatches and fiscal constraints
Evidence suggests that developing countries are much more concerned with stabilizing the nominal exchange rate than developed countries. This paper presents a model to explain this observation, based on the hypotheses that both interventions and depreciations are costly. Interventions are costly because they generate a financial need in a fiscally constrained government that relies solely on distortionary taxes. Depreciations are costly because the country, in particular its financial sector, is exposed to a currency mismatch between its assets and its liabilities that is not effectively ...
Journal Article
Buy foreign while you can: the cheap dollar and exchange rate pass-through
Despite the dollar?s real depreciation in the past few years, the U.S. trade deficit has continued to increase, with the level of imports reaching record highs. Why has the cheaper dollar not made imports more expensive and exports more attractive and, in turn, reduced the trade deficit? ; This article presents evidence on the degree of exchange rate pass-through (ERPT)?the extent to which U.S. domestic import prices have moved in response to changes in the exchange rate?from December 1993 through December 2004. Using monthly data, the authors first decompose domestic import prices to their ...
Working Paper
Reserve requirements, bank runs, and optimal policies in small open economies
This paper rationalizes as the outcome of an optimal policy decision the pattern of reserve requirements and other macroeconomic variables in the aftermath of a bank run. The paper develops a general equilibrium model that departs from the standard small open economy (SOE) model in three dimensions: (i) capital mobility is not perfect, (ii) there exists a costly banking system, and (iii) there is an externality affecting individual banks? decisions. The results suggest that the path of reserve requirements would depend on the type of shock that the economy receives and the effect that this ...