TY  - JOUR
AU  - Velasco, Andres
AU  - Chang, Roberto
TI  - Monetary Policy and the Currency Denomination of Debt: A Tale of Two Equilibria
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 10827
PY  - 2004
Y2  - October 2004
DO  - 10.3386/w10827
UR  - http://www.nber.org/papers/w10827
L1  - http://www.nber.org/papers/w10827.pdf
N1  - Author contact info:
Andrés Velasco
Columbia University
School of International and Public Affairs
420 West 118th Street
New York, NY 10027
Tel: 212/854-3899
E-Mail: avbranes@gmail.com

Roberto Chang
Rutgers University
Department of Economics
75 Hamilton Street
New Brunswick, NJ  08901
Tel: 732/932-7269
Fax: 732/932-7416
E-Mail: chang@econ.rutgers.edu
AB  - Exchange rate policies depend on portfolio choices, and portfolio choices depend on anticipated exchange rate policies. This opens the door to multiple equilibria in policy regimes. We construct a model in which agents optimally choose to denominate their assets and liabilities either in domestic or in foreign currency. The monetary authority optimally chooses to float or to fix the currency, after portfolios have been chosen. We identify conditions under which both fixing and floating are equilibrium policies: if agents expect fixing and arrange their portfolios accordingly, the monetary authority validates that expectation; the same happens if agents initially expect floating. We also show that a flexible exchange rate Pareto-dominates a fixed one. It follows that social welfare would rise if the monetary authority could precommit to floating.
ER  -