Publication
Jul 2010
How should monetary policy be optimally designed in an environment with high degrees of financial globalization? To answer this question we lay down an open economy model where net lending toward the rest of the world is constrained by a collateral constraint motivated by limited enforcement. Borrowing is secured by collateral in the form of durable goods whose accumulation is subject to adjustment costs. We demonstrate that, although this economy can generate persistent current account deficits, it can also deliver a stationary equilibrium. The comparison between different monetary policy regimes shows that the impossible trinity is reversed.
Download |
English (PDF, 45 pages, 1013 KB) |
---|---|
Author | Ester Faia, Esti Iliopoulos |
Series | Kiel Institute Working Papers |
Issue | 1639 |
Publisher | Kiel Institute for the World Economy |
Copyright | © 2010 Kiel Institute for the World Economy |