Financial Fragility and the Exchange Rate Regime

@article{Chang2000FinancialFA,
  title={Financial Fragility and the Exchange Rate Regime},
  author={Roberto Chang and Andr{\'e}s Velasco},
  journal={J. Economic Theory},
  year={2000},
  volume={92},
  pages={1-34}
}
We study financial fragility, exchange rate crises, and monetary policy in an open economy version of a Diamond-Dybvig model. The banking system, the exchange rate regime, and central bank credit policy are seen as parts of a mechanism intended to maximize social welfare; if the mechanism fails, banking crises and speculative attacks become possible. We compare currency boards, fixed rates, and flexible rates with and without a lender of last resort. A currency board cannot implement a socially… CONTINUE READING
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