- Ekonomi-tek
- Vol: 1 Issue: 3
- Financial Fragility, Exchange-Rate Regimes, and Sudden Stops in a Small Open Economy
Financial Fragility, Exchange-Rate Regimes, and Sudden Stops in a Small Open Economy
Authors : Wen-yao Grace Wang, Paula Hernandez-verme, Raymond A. K. Cox
Pages : 25-54
View : 10 | Download : 8
Publication Date : 2012-09-01
Article Type : Research
Abstract :We model a typical Asian economy in crisis using a dynamic general equilibrium technique and establishing exchange rates from nontrivial fiat currency demands. Sudden stops/bank panics are possible and are essential for evaluating the merits of alternative exchange-rate regimes. Strategic complementarities contribute to the severe indeterminacy of a continuum of equilibria. Social welfare and the scope of equilibria are also associated with the underlying policy regime and the built-in Sequential Checking Mechanism, including liquidity, solvency, and incentive-compatibility constraints in the model. Combining domestic and foreign reserve requirements promotes stability under a floating exchange-rate regime; however, this increases the scope for panic equilibria under both floating and fixed regimes. While backing the money supply reduces financial fragility under both systems, it only acts as a stabilizer in a fixed regime.Keywords : Sudden stops, exchange-rate regimes, multiple reserve requirements