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Currency mismatches and monetary policy: a tale of two equilibria

Chang, R and Velasco, Andres (2005) Currency mismatches and monetary policy: a tale of two equilibria. Journal of International Economics, 69 (1). pp. 150-175. ISSN 0022-1996

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Identification Number: 10.1016/j.jinteco.2005.05.008


We develop a model of a small economy whose residents choose whether to borrow in domestic or foreign currency. The central bank, in turn, chooses fixed or flexible exchange rates, taking the currency denomination of debts as given. We characterize the simultaneous determination of portfolios and exchange rate regime. Both floating and fixed rates can occur as equilibrium outcomes. “Fear of floating” may emerge endogenously and in association with a currency mismatch in assets and liabilities. If equilibria with both fixed rates and floating rates coexist, the latter is Pareto superior. Lessons for current “de-dollarization” proposals are discussed.

Item Type: Article
Official URL:
Additional Information: © 2006 Elsevier
Divisions: School of Public Policy
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Subjects: H Social Sciences > HG Finance
JEL classification: F - International Economics > F3 - International Finance > F34 - International Lending and Debt Problems
F - International Economics > F4 - Macroeconomic Aspects of International Trade and Finance > F41 - Open Economy Macroeconomics
Date Deposited: 11 Oct 2019 14:06
Last Modified: 20 Feb 2021 06:19

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