The collapse of the fixed exchange regime with sticky wages and imperfect substitutability between domestic and foreign bonds

Abstract

The paper extends the recent literature on balance-of-payments crises by allowing real effects to be connected with them. The collapse of the fixed exchange rate regime and the dynamics associated with this regime shift are studied. In addition, the effects of a fiscal expansion under the fixed exchange rate regime are studied, taking into account the fact that the viability of the regime is policy dependent.