Using a model of island economy where financial markets aggregate dispersed information of the public, we analyze how two-way communication between the central bank and the public affects inflation dynamics. When inflation target is observable and credible to the public, markets provide the bank...

We study theoretically how an economy adjusts to liberalization of interna-tional financial transaction. We consider an economy in which debtors do not repay unless the debts are secured by collateral, and collateralizable assets for international borrowing are more restricted than domestic...

After liberalizing international transactions of financial assets, many countries experience large swings in asset prices, capital flows, and aggregate production. This paper studies how the adjustment to capital account liberalization depends upon the degree of development of a domestic...