publication . Article . 2012

Financial Fragility, Exchange-Rate Regimes, and Sudden Stops in a Small Open Economy

Wen-Yao Grace Wang; Paula Hernandez-Verme; Raymond A. K. Cox Author E-mail:;
Open Access
  • Published: 01 Jan 2012 Journal: Ekonomi-tek, volume 1, issue 3 September, pages 25-54
We model a typical Asian economy in crisis using a dynamic general equilibrium technique and establishing exchange rates from nontrivial fiatcurrency 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 sta...
free text keywords: Sudden stops, exchange-rate regimes, multiple reserve requirements, jel:E31, jel:E44, jel:F41
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