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External shocks and exchange rate regimes in Southeast Asia: A DSGE analysis

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  • Sangaré, Ibrahima

Abstract

This paper investigates the choice of the appropriate exchange rate regime in the context where corporate debt is denominated in foreign currency. To address this issue, we build a small open economy DSGE model that incorporates financial frictions and alternative currency denominations of debt. We estimate the model using data from the five individual founding members of ASEAN and compare the welfare performance of four exchange rate regimes (floating, managed floating, target zone and fixed exchange rate). We find that the flexible exchange rate welfare dominates other regimes, whether debt is denominated in domestic or foreign currency. This finding suggests that the expenditure switching effects outweigh the balance sheet ones due to the countries' degree of trade openness.

Suggested Citation

  • Sangaré, Ibrahima, 2016. "External shocks and exchange rate regimes in Southeast Asia: A DSGE analysis," Economic Modelling, Elsevier, vol. 58(C), pages 365-382.
    • Handle: RePEc:eee:ecmode:v:58:y:2016:i:c:p:365-382
    DOI: 10.1016/j.econmod.2016.06.004
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    More about this item

    Keywords

    Exchange rate regimes; External shocks; Currency denomination of debt; Southeast Asia;
    All these keywords.

    JEL classification:

    • E3 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles
    • E4 - Macroeconomics and Monetary Economics - - Money and Interest Rates
    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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