Exchange rate policy under sovereign default risk
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Date
2011-02-08
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Abstract
We examine monetary policy options for a small open economy where sovereign
default might occur due to intertemporal insolvency. Under interest rate policy and
floating exchange rates the equilibrium is indetermined. Under a fixed exchange rate
the equilibrium is uniquely determined and independent of sovereign default.
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Keywords
Equilibrium, Intertemporal insolvency, Monetary policy options, Small open economy