scholarly journals Fluctuations of the Real Exchange Rate, Real Interest Rates, and the Dynamics of the Price of Gold in a Small Open Economy

2014 ◽  
Author(s):  
Christian Pierdzioch ◽  
Marian Risse ◽  
Sebastian Rohloff
Keyword(s):  
Exchange Rate ◽  
Interest Rates ◽  
Real Exchange Rate ◽  
Open Economy ◽  
Small Open Economy ◽  
Real Interest Rates ◽  
The Real

scholarly journals Risk Matters: The Real Effects of Volatility Shocks

2011 ◽  
Vol 101 (6) ◽  
pp. 2530-2561 ◽  
Author(s):  
Jesús Fernández-Villaverde ◽  
Pablo Guerrón-Quintana ◽  
Juan F Rubio-Ramírez ◽  
Martin Uribe
Keyword(s):  
Interest Rate ◽  
Interest Rates ◽  
Open Economy ◽  
Emerging Economies ◽  
Real Interest Rate ◽  
Small Open Economy ◽  
Real Interest Rates ◽  
The Real ◽  
Interest Rate Volatility ◽  
Business Cycle Model

We show how changes in the volatility of the real interest rate at which small open emerging economies borrow have an important effect on variables like output, consumption, investment, and hours. We start by documenting the strong evidence of time-varying volatility in the real interest rates faced by four emerging economies: Argentina, Brazil, Ecuador, and Venezuela. We estimate a stochastic volatility process for real interest rates. Then, we feed this process in a standard small open economy business cycle model. We find that an increase in real interest rate volatility triggers a fall in output, consumption, investment, hours, and debt. (JEL E13, E20, E32, E43, F32, F43, 011)

scholarly journals A Theory of Foreign Exchange Interventions

2021 ◽  
Author(s):  
Sebastián Fanelli ◽  
Ludwig Straub
Keyword(s):  
Exchange Rate ◽  
Central Bank ◽  
Interest Rates ◽  
Open Economy ◽  
Small Open Economy ◽  
Bond Markets ◽  
Pecuniary Externality ◽  
Optimal Intervention ◽  
The Exchange Rate ◽  
Intervention Policy

Abstract We study a real small open economy with two key ingredients (1) partial segmentation of home and foreign bond markets and (2) a pecuniary externality that makes the real exchange rate excessively volatile in response to capital flows. Partial segmentation implies that, by intervening in the bond markets, the central bank can affect the exchange rate and the spread between home- and foreign-bond yields. Such interventions allow the central bank to address the pecuniary externality, but they are also costly, as foreigners make carry trade profits. We analytically characterize the optimal intervention policy that solves this trade-off: (1) the optimal policy leans against the wind, stabilizing the exchange rate; (2) it involves smooth spreads but allows exchange rates to jump; (3) it partly relies on “forward guidance,” with non-zero interventions even after the shock has subsided; (4) it requires credibility, in that central banks do not intervene without commitment. Finally, we shed light on the global consequences of widespread interventions, using a multi-country extension of our model. We find that, left to themselves, countries over-accumulate reserves, reducing welfare and leading to inefficiently low world interest rates.

Sign in / Sign up

Export Citation Format

Share Document