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

Author

Listed:
  • Wen-Yao Grace Wang

    (Texas A&M University at Galveston)

  • Paula Hernandez-Verme

    (Universidad de Guanajuato)

  • Raymond A. K. Cox Author E-mail: rcox@unbc.ca

    (University of Northern British Columbia)

Abstract

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 stability under a floating exchange-rate regime; however, this increases the scope for panic equilibria under both floating and fixed regimes. While backing the money supply reduces financial fragility under both systems, it only acts as a stabilizer in a fixed regime.

Suggested Citation

  • Wen-Yao Grace Wang & Paula Hernandez-Verme & Raymond A. K. Cox Author E-mail: rcox@unbc.ca, 2012. "Financial Fragility, Exchange-Rate Regimes, and Sudden Stops in a Small Open Economy," Ekonomi-tek - International Economics Journal, Turkish Economic Association, vol. 1(3), pages 25-54, September.
  • Handle: RePEc:tek:journl:v:1:y:2012:i:3:p:25-54
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    References listed on IDEAS

    as
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    More about this item

    Keywords

    Sudden stops; exchange-rate regimes; multiple reserve requirements;
    All these keywords.

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E44 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Financial Markets and the Macroeconomy
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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