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Discretionary policy in a small open economy: exchange rate regimes and multiple equilibria

Himmels, Christoph ORCID: and Kirsanova, Tatiana 2018. Discretionary policy in a small open economy: exchange rate regimes and multiple equilibria. Journal of Macroeconomics 56 , pp. 53-64. 10.1016/j.jmacro.2018.01.001

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We study a Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We analyze inflation and exchange rate targeting regimes and demonstrate that both cases may result in multiple equilibria. These equilibria feature qualitatively and quantitatively different economic dynamics following the same shock. The model can help us to understand sudden changes in the interest rate and exchange rate volatility in ‘tranquil’ and ‘volatile’ times under a fully credible ‘soft peg’ of the nominal exchange rate.

Item Type: Article
Date Type: Publication
Status: Published
Schools: Business (Including Economics)
Subjects: H Social Sciences > HB Economic Theory
Publisher: Elsevier
ISSN: 0164-0704
Date of First Compliant Deposit: 1 August 2018
Date of Acceptance: 1 January 2018
Last Modified: 07 Nov 2023 03:50

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