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Balance Sheets and Exchange Rate Policy / Luis Felipe Cespedes, Roberto Chang, Andres Velasco.
- Format:
- Book
- Author/Creator:
- Cespedes, Luis Felipe.
- Series:
- Working Paper Series (National Bureau of Economic Research) no. w7840.
- NBER working paper series no. w7840
- Language:
- English
- Physical Description:
- 1 online resource: illustrations (black and white);
- Place of Publication:
- Cambridge, Mass. National Bureau of Economic Research 2000.
- Summary:
- We study the relation among exchange rates, balance sheets, and macroeconomic outcomes in a small open economy. Because liabilities are dollarized,' a real devaluation has detrimental effects on entreprenurial net worth, which in turn constrains investment due to financial frictions. But there is an offsetting effect, int hat devaluation expands home output and the return to domestic investment, which are also components of net worth. We show that the impact of an adverse foreign shock can be strongly magnified by the balance sheet effect of the associated real devaluation. But the fall in output employment, and investment is stronger under fixed exchange rates than under flexible rates. Hence the conventional wisdom, that flexible exchange rates are better absorbers of real foreign shocks than are fixed rates, holds in spite of potentially large balance sheet effects.
- Notes:
- Print version record
- August 2000.
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