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Vox article: In a Great Recession, the case for flexible exchange rates is alive and well, by Giancarlo Corsetti, Gernot Müller, Keith Kuester

last modified Sep 17, 2017 07:43 PM

Vox article: In a Great Recession, the case for flexible exchange rates is alive and well, by Giancarlo Corsetti, Gernot Müller, Keith Kuester 

The classic rationale for flexible exchange rates was that policymakers would be unconstrained by currency targets. The Great Recession, however, saw numerous central banks constrained instead by the zero lower bound. This column considers which exchange rate regime is best for small open economies in a global recession. The model suggests that if the source of the shock is abroad and foreign interest rates become constrained at their zero lower bound, then flexible exchange rates do provide a great deal of insulation to the domestic economy.

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