Publication Type
Journal Article
Version
acceptedVersion
Publication Date
9-2024
Abstract
I jointly study the optimal bailout policy and monetary policy in open economies that borrow in foreign currency from international lenders. A policy dilemma emerges during financial crises. Policymakers trade off the benefit of more bailouts alleviating firms’ financial constraints against the cost of larger currency devaluation, which tightens firms’ financial constraints. I embed the optimal bailout in an otherwise standard “sudden stop” model with nominal rigidities. The model sheds light on the role of bailouts and currency mismatch in driving the exchange rate dynamics, firms’ balance sheets and economic recovery. Quantitatively, the model matches key business cycle moments. A welfare evaluation shows that there are in general welfare gains from the systemic bailout policy despite ex ante moral hazard problems of firms.
Keywords
Bailout policy, Exchange rate, Financial crises, Foreign currency debt, Open economies
Discipline
Finance | International Economics
Publication
Journal of International Economics
Volume
151
First Page
1
Last Page
24
ISSN
0022-1996
Identifier
10.1016/j.jinteco.2024.103962
Publisher
Elsevier
Citation
JIAO, Yang.
Financial crises, bailouts and monetary policy in open economies. (2024). Journal of International Economics. 151, 1-24.
Available at: https://ink.library.smu.edu.sg/soe_research/2774
Copyright Owner and License
Authors
Creative Commons License
This work is licensed under a Creative Commons Attribution-NonCommercial-No Derivative Works 4.0 International License.
Additional URL
https://doi.org/10.1016/j.jinteco.2024.103962