We examine monetary policy options for a small open economy where sovereign default might occur due to intertemporal insolvency. Under interest rate policy and floating exchange rates the equilibrium is indetermined. Under a fixed exchange rate the equilibrium is uniquely determined and independent of sovereign default.
# 11-027/2 (2011-02-11)
- Andreas Schabert, TU Dortmund University, and University of Amsterdam
- Exchange rate peg, interest rate policy, equilibrium determination, sovereign default, public debt
- JEL codes:
- E52, E63, F31, F41