Credit Constrained Consumers, Inflation Inertia and Instability Under Fixed Exchange Rates
19 Pages Posted: 9 Nov 2006
Date Written: October 9, 2006
This paper investigates stability in a small open economy under fixed exchange rates when a proportion of consumers are credit constrained, and there exists some degree of inflation inertia. We show that the combination of these two elements may generate significant cyclical behaviour, and that these cycles may become explosive under certain parameterisations. The influence of changes in competitiveness on demand helps generate cyclicality, but in itself does not prevent the possibility of global instability.
Keywords: Macroeconomic stability, Fixed exhange rate
JEL Classification: E52, E61, E63, F41
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