Journal Article
Financial Frictions and The Choice of Exchange Rate Regimes
This paper provides a quantitative assessment of the role of financial frictions in the choice
of exchange rate regimes. I use a two country model with sticky prices to compare different
exchange rate arrangements. I simulate the model without and with borrowing constraints
on investment, under monetary policy and technology shocks. I find that the stabilization
properties of floating exchange rate regimes in face of foreign shocks are enhanced relative to
fixed exchange rates in presence of credit frictions. In presence of symmetric and correlated
shocks fixed exchange rates regimes can perform better than floating. This analysis can have
important policy implications for accession countries joining the ERM II system and with high
degrees of credit frictions.
Schlagworte
- Stabilisierungspolitik