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

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