Exchange rate regimes and financial market imperfections:
This paper investigates the design of an exchange rate policy for an economy where the domestic capital market is segmented from the global financial market, producers rely on credit to finance working capital needs, and the labor market is characterized by nominal contracts. We show that the choice...
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| Main Authors: | , |
|---|---|
| Format: | Book |
| Language: | English |
| Published: |
Cambridge, Mass.
NBER
2000
|
| Series: | Working paper series / National Bureau of Economic Research
7738 |
| Links: | http://papers.nber.org/papers/w7738.pdf |
| Summary: | This paper investigates the design of an exchange rate policy for an economy where the domestic capital market is segmented from the global financial market, producers rely on credit to finance working capital needs, and the labor market is characterized by nominal contracts. We show that the choice of an exchange rate regime is intertwined with the financial structure -- greater reliance on working capital to finance input needs, and greater segmentation of the domestic capital market increase the desirable exchange rate stability. This result follows from the observation that greater exchange rate stability is likely to reduce the real interest rate facing the producer, thereby increasing output. Hence, greater reliance on working capital increases the welfare gain attached to the lower interest rate associated with lower flexibility of the exchange rate, thereby increasing the desirability of a fixed exchange rate. Similarly, greater integration with the global capital market reduces the real interest rate benefits from exchange rate stability, increasing thereby the optimal flexibility of the exchange rate, and reducing the demand for international reserves. |
| Physical Description: | 21 S. 22 cm |
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| 520 | |a This paper investigates the design of an exchange rate policy for an economy where the domestic capital market is segmented from the global financial market, producers rely on credit to finance working capital needs, and the labor market is characterized by nominal contracts. We show that the choice of an exchange rate regime is intertwined with the financial structure -- greater reliance on working capital to finance input needs, and greater segmentation of the domestic capital market increase the desirable exchange rate stability. This result follows from the observation that greater exchange rate stability is likely to reduce the real interest rate facing the producer, thereby increasing output. Hence, greater reliance on working capital increases the welfare gain attached to the lower interest rate associated with lower flexibility of the exchange rate, thereby increasing the desirability of a fixed exchange rate. Similarly, greater integration with the global capital market reduces the real interest rate benefits from exchange rate stability, increasing thereby the optimal flexibility of the exchange rate, and reducing the demand for international reserves. | ||
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Record in the Search Index
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| indexdate | 2024-12-20T13:23:12Z |
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| physical | 21 S. 22 cm |
| publishDate | 2000 |
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| series2 | Working paper series / National Bureau of Economic Research |
| spelling | Aizenman, Joshua 1949- Verfasser (DE-588)124080057 aut Exchange rate regimes and financial market imperfections Joshua Aizenman ; Ricardo Hausmann Cambridge, Mass. NBER 2000 21 S. 22 cm txt rdacontent n rdamedia nc rdacarrier Working paper series / National Bureau of Economic Research 7738 This paper investigates the design of an exchange rate policy for an economy where the domestic capital market is segmented from the global financial market, producers rely on credit to finance working capital needs, and the labor market is characterized by nominal contracts. We show that the choice of an exchange rate regime is intertwined with the financial structure -- greater reliance on working capital to finance input needs, and greater segmentation of the domestic capital market increase the desirable exchange rate stability. This result follows from the observation that greater exchange rate stability is likely to reduce the real interest rate facing the producer, thereby increasing output. Hence, greater reliance on working capital increases the welfare gain attached to the lower interest rate associated with lower flexibility of the exchange rate, thereby increasing the desirability of a fixed exchange rate. Similarly, greater integration with the global capital market reduces the real interest rate benefits from exchange rate stability, increasing thereby the optimal flexibility of the exchange rate, and reducing the demand for international reserves. Hausmann, Ricardo Verfasser (DE-588)114734712 aut Erscheint auch als Online-Ausgabe National Bureau of Economic Research <Cambridge, Mass.> NBER working paper series 7738 (DE-604)BV002801238 7738 http://papers.nber.org/papers/w7738.pdf kostenfrei Volltext |
| spellingShingle | Aizenman, Joshua 1949- Hausmann, Ricardo Exchange rate regimes and financial market imperfections |
| title | Exchange rate regimes and financial market imperfections |
| title_auth | Exchange rate regimes and financial market imperfections |
| title_exact_search | Exchange rate regimes and financial market imperfections |
| title_full | Exchange rate regimes and financial market imperfections Joshua Aizenman ; Ricardo Hausmann |
| title_fullStr | Exchange rate regimes and financial market imperfections Joshua Aizenman ; Ricardo Hausmann |
| title_full_unstemmed | Exchange rate regimes and financial market imperfections Joshua Aizenman ; Ricardo Hausmann |
| title_short | Exchange rate regimes and financial market imperfections |
| title_sort | exchange rate regimes and financial market imperfections |
| url | http://papers.nber.org/papers/w7738.pdf |
| volume_link | (DE-604)BV002801238 |
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