Economics

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Output structure, debt denomination, and exchange rate regimes
(2004-04-20) Magud, Nicolas Ernesto; Reinhart, Carmen; Economics
The dissertation analyzes the choice of an exchange rate regime for a small open economy indebted in foreign currency, incorporating the financial accelerator. Conventional wisdom suggests that floating regimes should insulate the economy from real shocks. I show that this result depends on the degrees of openness of the economy and foreign currency indebtedness and, in fact, does not hold for relatively closed economies. The transmission mechanism relies on nonlinearities in the impact of unanticipated real price changes on the external finance premium, similar to Fisher (1933). To test this, a VAR with exogenous terms of trade shocks is performed: a 32 country sample for the period 1980-2001 is split according to the degree of openness of the economy. The results confirm the theoretical conclusions.