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The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria

Author

Listed:
  • Christoph Himmels

    (Department of Economics, University of Exeter)

  • Tatiana Kirsanova

    (Department of Economics, University of Exeter)

Abstract
We study a credible Markov-perfect monetary policy in an open New Keynesian economy with incomplete financial markets. We demonstrate the existence of two discretionary equilibria. Following a shock the economy can be stabilised either 'quickly' or 'slow', both dynamic paths satisfy conditions of optimality and time-consistency. The model can help us to understand sudden change of the interest rate and exchange rate volatility in 'tranquil' and 'volatile' regimes even under a fully credible 'soft peg' of the nominal exchange rate in developing countries.

Suggested Citation

  • Christoph Himmels & Tatiana Kirsanova, 2009. "The interest rate - exchange rate nexus: exchange rate regimes and policy equilibria," Discussion Papers 0904, University of Exeter, Department of Economics.
    • Handle: RePEc:exe:wpaper:0904
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    1. Apostolis Philippopoulos & Petros Varthalitis & Vanghelis Vassilatos, 2013. "Optimal Fiscal Action in an Economy with Sovereign Premia and without Monetary Independence: An Application to Italy," CESifo Working Paper Series 4199, CESifo.

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    More about this item

    Keywords

    Small open economy; Incomplete ?nancial markets; Discretionary Monetary policy; Multiple Equilibria;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • E61 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Policy Objectives; Policy Designs and Consistency; Policy Coordination
    • C61 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling - - - Optimization Techniques; Programming Models; Dynamic Analysis
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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