In this paper we demonstrate that exchange rate regime switching is compatible with optimal government policies. Nominal exchange-rate regimes are formalized as equilibrium commitments on future seigniorage policies, and the collapse of an exchange-rate peg as an excusable default which allows...

This paper presents an overview of recent theoretical and empirical reserach on "liquidity models" in open economies; this is a class of optimizing models where money has effects on real asset prices and economic activity without relying on the "ad-hoc" assumption of price/wage stickiness. The...

This paper considers the empirical evidence on liquidity effects in open economies; we study the effects of monetary policy shocks (identified by innovations in interest rates) on exchange rates. Both overshooting models with short-run price stickiness and flexible-price models with "liquidity...

A common argument against either a monetary union or a regime or a fixed exchange rates is that they preclude flexible use of the inflation tax. The authors address this point of view by comparing three alternative exchange rate regimes: a pure float, an EMS-regime in which the exchange rate is...

This paper presents a two-country extension of Lucas' (1988) work on the effects of cash-in-advance constraints in asset markets on the pricing of financial assets. The model is one where there exists some degree of separation between the goods markets and the asset markets and money is used for...

This paper investigates the effectiveness of the monetary authority's borrowing policies in resolving exchange rate crises. It shows why obtaining loans or lines of credit in foreign currency may avoid, at least temporarily, the devaluation of a fixed exchange rate, and discusses the problem of...