Exchange Rate Policy Under Sovereign Default Risk
Tinbergen Institute Discussion Paper 11-027/2
10 Pages Posted: 13 Feb 2011
Date Written: January 31, 2011
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.
Keywords: Exchange rate peg, interest rate policy, equilibrium determination, sovereign default, public debt
JEL Classification: E52, E63, F31, F41
Suggested Citation: Suggested Citation
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