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We evaluate the desirability of having an elastic currency generated by a lender of last resort that prints money and lends it to banks in distress. When banks cannot borrow, the economy has a unique equilibrium that is not Pareto optimal. The introduction of unlimited borrowing at a zero...
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We consider the nature of the relationship between the real exchange rate and capital formation. We present a model of a small open economy that produces and consumes two goods, one tradable and one not. Domestic residents can borrow and lend abroad, and costly state verification (CSV) is a...
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We consider a small open economy where domestic residents combine their own income with credit obtained either at home or abroad in order to finance capital investments. These investments are subject to a costly state verification (CSV) problem. In addition, lenders to domestic residents...
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We consider the question how "best" to maintain price-level stability in an open economy, and evaluate three possible policy choices: (a) a constant money growth rate rule; (b) a fixed exchange rate; and (c) a policy of explicit commitment to a price-level target. In each case we assume that...
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