Devaluation Risk and the Business Cycle Implications of Exchange Rate Management

  title={Devaluation Risk and the Business Cycle Implications of Exchange Rate Management},
  author={Enrique G. Mendoza and Duke},
Wha t is the mechanism driving the business cycle associated with stabilization policies anchored on managed exchange rates? Perfectforesight models used extensively to t ry to answer this question have been unable to explain key quantitative features of the data. To do so it is necessary to consider devaluation risk in an environment of incomplete insurance markets in which stochastic price and wealth distortions operate. Simulations applied to Mexican data show that these distortions are… CONTINUE READING
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