Monetary policy and the currency denomination of debt
Subtitle: a tale of two equilibria
By: Andres Velasco, Roberto Chang.
Contributors: Chang, Roberto.; National Bureau of Economic Research.
Series: NBER working paper series ;; working paper 10827; Working paper series (National Bureau of Economic Research : Online) ;; working paper no. 10827.
Publisher: National Bureau of Economic Research
Published: 2004
Place of publication: Cambridge, MA
Language: eng
Format: Electronic resource
Subjects: Monetary policy.; Foreign exchange rates.
Description: "Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies.  This opens the door to multiple equilibria in policy regimes.  We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency.  The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen.  We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary authority validates that expectation; the same happens if agents initially expect floating.  We also show that a flexible exchange rate Pareto-dominates a fixed one.  It follows that social welfare would rise if the monetary authority could precommit to floating"--National Bureau of Economic Research web site.
Notes: Includes bibliographical references.
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