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Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy

Hernandez-Verme, Paula and Wang, Wen-Yao (2009): Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy.

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Abstract

We model a typical Asian-crisis-economy using dynamic general equilibrium tech-niques. Exchange rates obtain from nontrivial fiat-currencies demands. Sudden stops/bank-panics are possible, and key for evaluating the merits of alternative ex-change rate regimes. Strategic complementarities contribute to the severe indetermi-nacy of the continuum of equilibria. The scope for existence and indeterminacy of equilibria and dynamic properties are associated with the underlying policy regime. Binding multiple reserve requirements promote stability under floating but increase the scope for panic equilibria under both regimes. Backing the money supply acts as a stabilizer only in fixed regimes, but reduces financial fragility under both regimes.

Item Type:	MPRA Paper
Original Title:	Multiple Reserve Requirements, Exchange Rates, Sudden Stops and Equilibrium Dynamics in a Small Open Economy
Language:	English
Keywords:	Sudden stops; Bank runs; Exchange rate regimes; Multiple reserve requirements; Dynamic Stochastic General Equilibrium; Open Economy Macroeconomics; International Financial crises.
Subjects:	G - Financial Economics > G1 - General Financial Markets > G14 - Information and Market Efficiency ; Event Studies ; Insider Trading E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E43 - Interest Rates: Determination, Term Structure, and Effects F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems E - Macroeconomics and Monetary Economics > E3 - Prices, Business Fluctuations, and Cycles > E31 - Price Level ; Inflation ; Deflation O - Economic Development, Innovation, Technological Change, and Growth > O5 - Economywide Country Studies > O53 - Asia including Middle East E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E44 - Financial Markets and the Macroeconomy G - Financial Economics > G3 - Corporate Finance and Governance > G33 - Bankruptcy ; Liquidation F - International Economics > F3 - International Finance > F33 - International Monetary Arrangements and Institutions O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O11 - Macroeconomic Analyses of Economic Development F - International Economics > F3 - International Finance > F32 - Current Account Adjustment ; Short-Term Capital Movements E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies E - Macroeconomics and Monetary Economics > E4 - Money and Interest Rates > E42 - Monetary Systems ; Standards ; Regimes ; Government and the Monetary System ; Payment Systems O - Economic Development, Innovation, Technological Change, and Growth > O1 - Economic Development > O16 - Financial Markets ; Saving and Capital Investment ; Corporate Finance and Governance E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy E - Macroeconomics and Monetary Economics > E6 - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook > E65 - Studies of Particular Policy Episodes F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics F - International Economics > F3 - International Finance > F31 - Foreign Exchange G - Financial Economics > G2 - Financial Institutions and Services > G21 - Banks ; Depository Institutions ; Micro Finance Institutions ; Mortgages
Item ID:	16748
Depositing User:	Paula L Hernandez-Verme
Date Deposited:	11 Aug 2009 15:01
Last Modified:	27 Sep 2019 16:23
References:	1. Bencivenga, V.R. and D..B. Smith (2002), “What to Stabilize in the Open Economy,” International Economic Review, Vol. 43, No. 4: 1289-1307. 2. Chang, R. and A. Velasco (2000a), “Banks, Debt Maturity and Financial Crises,” Journal of International Eco-nomics, Vol. 50, No. 1: 169-94. 3. _____________ (2000b), “Financial Fragility and the Exchange Rate Regime,” Journal of Economic Theory, Vol. 92, No. 1: 1-34. 4. ____________ (2001), “A Model of Financial Crises in Emerging Markets,” The Quarterly Journal of Economics, Vol. 116, No. 2: 489-517. 5. Cole, H.L. and T.J. Kehoe (1996), “A Self-Fulfilling Model of Mexico’s 1994-1995 Debt Crisis,” Journal of In-ternational Economics, Vol. 41, 309-330. 6. Diamond, D.W. and P.H. Dybvig (1983,) “Bank Runs, Deposit Insurance, and Liquidity,” The Journal of Political Economy, Vol. 91, No. 3: 401-419. 7. Frankel, J.A., S. L. Schmukler, and L. Serven (2002), “Global Transmission of Interest Rates: Monetary Indepen-dence and Currency Regime,” NBER Working Paper 8828. 8. Hernandez-Verme, P.L. (2004,) “Inflation, Growth and Exchange Rate Regimes in Small Open Economies,” Eco-nomic Theory, Vol. 24, No. 4: 839-856. 9. Hernandez-Verme, P.L. (2009,) “Credit Chains and Mortgage Crises,” Working Paper. 10. Kaminsky, G.L. (2003), “Varieties of Currency Crises,” NBER Working Paper 10193. 11. Kishi, M. and H. Okuda (2001), “Prudential Regulation and Supervision of the Financial System in East Asia,” Institute for international monetary affairs. Available at http://www.mof.go.jp/jouhou/kokkin/tyousa/tyou041g.pdf 12. Lindgren, C-J., Baliño, T.J.T., Enoch, C., Gulde, A-M., Quintyn, M. and L. Teo (1999), “Financial Sector Crisis and Restructuring. Lessons from Asia. International Monetary Fund, Occasional Paper 188.
URI:	https://mpra.ub.uni-muenchen.de/id/eprint/16748

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