Economics Seminar: Financial Crises, Exchange Rates and Macro-prudential Policies

When?

Wednesday 23 November 2011, 16:00 to 17:00

Where?

04AD00

Open to:

Public, Staff, Students

Speaker:

Luca Fornaro

Mr. Luca Fornaro (LSE and PSE)

"Financial Crises, Exchange Rates and Macro-prudential Policies"

Abstract

This paper develops a small open economy monetary model in which  tranquil times endogenously alternate with financial crises driven by sudden stops in capital inflows. The goal is to study the interactions between exchange rate regimes and macro-prudential policies. Fixed exchange rates exacerbate the fall in output and consumption during sudden stops. Because of this, the welfare gains from introducing macro-prudential policies are much higher in economies with currency pegs. Moreover, the welfare gains of switching from a peg to a floating exchange rate regime are similar to the gains from adopting macro-prudential policies and maintaining the peg.