We consider two types of rms both operating in two countries. The demand side of the markets of the two countries are separated and each type of rm produces its good in one of these countries. We study the e ect of an exchange rate change on the competitive equilibrium prices in each country. When producing for the foreign market causes the same costs as producing for the home market then the `...

We model sudden stops in a small open economy as rare discrete events precipitated by increases the world risk-free rate. When external debt is large, exhibits multiple equilibria, one where and consumption remain high, with collapse consumption. Private agents delever following an increase interest rate, but they fail to internalize impact of deleveraging on price collateral. For high levels d...

a r t i c l e i n f o This paper introduces a strategy to model a small open economy, whose central bank has established two simultaneous policy objectives: an inflation target, and a maximum limit for nominal exchange rate volatility. In line with the Tinbergen–Aoki condition, the monetary authority establishes two policy instruments, one for accomplishing each target: the monetary policy rate...