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Currency Mismatch, Openness and Exchange Rate Regime Choice

Author

Listed:
  • Nicolas Magud

    (University of Oregon Economics Department)

Abstract
The paper analyzes the choice of an exchange rate regime for a small open economy indebted in foreign currency, incorporating the ¯nancial accelerator. Conventional wisdom suggests that floating regimes should insulate the economy from real shocks. I show that this result depends on the degrees of openness of the economy and foreign currency indebtedness and, in fact, does not hold for relatively closed economies. The transmission mechanism relies on nonlinearities in the impact of unanticipated real price changes on the external finance premium, in the spirit Fisher (1933).

Suggested Citation

  • Nicolas Magud, 2002. "Currency Mismatch, Openness and Exchange Rate Regime Choice," University of Oregon Economics Department Working Papers 2004-14, University of Oregon Economics Department, revised 01 Sep 2004.
    • Handle: RePEc:ore:uoecwp:2004-14
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    References listed on IDEAS

    as
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    Citations

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    Cited by:

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    2. Liu, Jie & Wei, Wei & Shi, Yao-Bo & Chang, Chun-Ping, 2020. "The nexus between country risk and exchange rate regimes: A global investigation," The North American Journal of Economics and Finance, Elsevier, vol. 51(C).
    3. Mohammad Tarequl Hasan Chowdhury & Prasad Sankar Bhattacharya & Debdulal Mallick & Mehmet Ali Ulubaşoğlu, 2015. "Persistence, Capital Account Openness, and Financial Sector Health in Exchange Rate Regime Choice," The Economic Record, The Economic Society of Australia, vol. 91(294), pages 279-299, September.
    4. Yan Carrière‐Swallow & Nicolás E. Magud & Juan F. Yépez, 2021. "Exchange rate flexibility, the real exchange rate, and adjustment to terms‐of‐trade shocks," Review of International Economics, Wiley Blackwell, vol. 29(2), pages 439-483, May.
    5. Chowdhury, Mohammad Tarequl Hasan & Bhattacharya, Prasad Sankar & Mallick, Debdulal & Ulubaşoğlu, Mehmet Ali, 2016. "Exchange rate regimes and fiscal discipline: The role of trade openness," International Review of Economics & Finance, Elsevier, vol. 45(C), pages 106-128.
    6. Bruno Coric, 2011. "The financial accelerator effect: concept and challenges," Financial Theory and Practice, Institute of Public Finance, vol. 35(2), pages 171-196.
    7. N. R. Ramírez-Rondán, 2019. "Balance sheet and currency mismatch: evidence for Peruvian firms," Empirical Economics, Springer, vol. 57(2), pages 449-473, August.
    8. Carlos A. Vegh & Luis Morano & Diego Friedheim & Diego Rojas, "undated". "Between a Rock and a Hard Place," World Bank Publications - Reports 28443, The World Bank Group.
    9. Mr. Yan Carriere-Swallow & Mr. Nicolas E Magud & Juan Yepez, 2018. "No Pain, All Gain? Exchange Rate Flexibility and the Expenditure-Switching Effect," IMF Working Papers 2018/213, International Monetary Fund.
    10. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2011. "The relationship between investment and large exchange rate depreciations in dollarized economies," Journal of International Money and Finance, Elsevier, vol. 30(7), pages 1265-1279.
    11. Herman Kamil, 2012. "How Do Exchange Rate Regimes Affect Firms' Incentives to Hedge Currency Risk? Micro Evidence for Latin America," IMF Working Papers 2012/069, International Monetary Fund.
    12. Bitar, Joseph, 2021. "The unique dollarization case of Lebanon," Economic Systems, Elsevier, vol. 45(2).

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    More about this item

    Keywords

    Currency Mismatch; Liability Dollarization; Balance Sheets; Exchange Rate Regimes; Openness; Nominal Rigidities;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E32 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Business Fluctuations; Cycles
    • F34 - International Economics - - International Finance - - - International Lending and Debt Problems
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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