TY - JOUR
T1 - Sovereign default in a currency area
T2 - A monetary general equilibrium model
AU - Hernandez-Del-valle, Adrian
AU - Martínez-Garcia, Claudia I.
AU - Venegas-Martínez, Francisco
N1 - Publisher Copyright:
© 2016 Academic Publications, Ltd.
PY - 2016
Y1 - 2016
N2 - Real exchange rate overvaluation can induce default. In a currency area formed by two countries, we prove that if prices differ even slightly then inflations will diverge persistently and monetary policy will be unable to suit all currency area members. In fact, it will affect area members inversely. We show that risk premia are time-varying and determined by real exchange rate overvaluation. Finally, we find a transmission mechanism from the overvaluation of the real exchange rate of a currency area member to his default.
AB - Real exchange rate overvaluation can induce default. In a currency area formed by two countries, we prove that if prices differ even slightly then inflations will diverge persistently and monetary policy will be unable to suit all currency area members. In fact, it will affect area members inversely. We show that risk premia are time-varying and determined by real exchange rate overvaluation. Finally, we find a transmission mechanism from the overvaluation of the real exchange rate of a currency area member to his default.
KW - Cash-in-advance
KW - Currency areas
KW - Monetary general equilibrium
KW - Purchasing power parity
KW - Sovereign default
KW - Stochastic pricing kernel
KW - Time-varying risk premia
UR - http://www.scopus.com/inward/record.url?scp=84976351487&partnerID=8YFLogxK
U2 - 10.12732/ijpam.v108i2.4
DO - 10.12732/ijpam.v108i2.4
M3 - Artículo
SN - 1311-8080
VL - 108
SP - 227
EP - 261
JO - International Journal of Pure and Applied Mathematics
JF - International Journal of Pure and Applied Mathematics
IS - 2
ER -