Financial market segmentation and choice of exchange rate regimes

Document Type

Article

Publication Title

Economics Letters

Abstract

We study the choice of exchange rate regime in a small open economy with segmented asset markets subjected to financial sector shocks. We show that the state-contingent optimal policy facilitates risk sharing between asset market participants and non-participants, and is countercyclical. Our results establish that contrary to existing literature, flexible exchange rates mimic optimal policy and welfare dominates fixed exchange rates.

Publication Date

1-5-2016

Publisher

Elsevier

Volume

Vol.142

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