A small open economy with a credibly fixed exchange rate and free capital mobility attempts to set its domestic interest rate significantly above the rate of the country to which its currency is pegged. What is the most direct and unavoidable consequence for the country's central bank as it tries to maintain the fixed exchange rate?
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Defending a Non-Credible Currency Peg
A small open economy with a credibly fixed exchange rate and free capital mobility attempts to set its domestic interest rate significantly above the rate of the country to which its currency is pegged. What is the most direct and unavoidable consequence for the country's central bank as it tries to maintain the fixed exchange rate?