The paper models an adjustable peg exchange rate arrangement as a policy rule with an escape clause under which the timing and magnitudes of realignments are the outcomes of policy optimization decisions. Under the assumptions that market participants are rational, risk averse, and fully...

The merits of rules and discretion for monetary policy are considered when the structure of the macroeconomic model and the probability distributions of disturbances are not well defined. When it is costly to delay policy reactions to seldom-experienced shocks until formal algorithmic learning...

This paper focuses on the portfolio-balance model as a framework for addressing several unresolved issues about the behavior of exchange rates. A major objective is to contribute to an understanding of the relative importance of the different channels through which current account imbalances may...

Although existing models of systematic exchange rate behavior perform little or no better than random-walk models in out-of-sample forecasting tests based on realized values of explanatory variables, this paper finds scope for some optimism that the empirical modeling of exchange rates will...

The impact of exchange rate regimes on domestic and foreign investment in the presence of a short-run Phillips curve is investigated. Producers may diversify internationally to increase the flexibility of production, thereby diversifying country-specific productivity and monetary shocks....

Conditions under which renewed international lending will benefit both the developed and the developing countries are identified. We evaluate how the presence of terms of trade adjustment and distorted credit markets affect the conditions for the existence of beneficial lending. We demonstrate...

This paper interprets contagion effects as an increase in the volatility of shocks impinging on the economy. The implications of this approach are analyzed in a model in which domestic banks borrow at a premium on world capital markets, and domestic producers borrow at a premium from domestic...