Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/197159 
Year of Publication: 
2018
Citation: 
[Journal:] Theoretical Economics [ISSN:] 1555-7561 [Volume:] 13 [Issue:] 2 [Publisher:] The Econometric Society [Place:] New Haven, CT [Year:] 2018 [Pages:] 637-666
Publisher: 
The Econometric Society, New Haven, CT
Abstract: 
When do flexible exchange rates prevent monetary and financial conditions from spilling over across currencies? We examine a model in which international investors strategically supply capital to a small inflation-targeting economy with flexible exchange rates. For some combination of parameters, the unique equilibrium exhibits the observed empirical feature of prolonged episodes of capital inflows and appreciation of the domestic currency, followed by reversals where capital outflows go hand-in-hand with currency depreciation, a rise in domestic interest rates, and inflationary pressure. Arbitrarily small shocks to global financial conditions suffice to trigger these dynamics.
Subjects: 
Financial crises
global games
JEL: 
C7
E5
F4
Persistent Identifier of the first edition: 
Creative Commons License: 
cc-by-nc Logo
Document Type: 
Article

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