Collapse of a Crawling Peg Regime in the Presence of a Government Budget Constraint

Author/Editor:

Miguel A Savastano

Publication Date:

April 1, 1991

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This study extends the research on balance-of-payments crises by investigating the dynamics of the collapse of a crawling exchange rate in the presence of an explicit link between the fiscal deficit and domestic credit. It shows that such an exchange rate regime is characterized by two potential steady-state equilibria. This introduces an ex-ante indeterminacy regarding the timing and magnitude of the speculative attack on international reserves in the event of a sustained inconsistency between the country’s fiscal and exchange rate policies. The paper discusses the conditions that would define the actual timing of the regime’s breakdown.

Series:

Working Paper No. 91/42

Notes:

Also published in Staff Papers, Vol. 39, No. 1, March 1992.

English

Publication Date:

April 1, 1991

ISBN/ISSN:

9781451846140/1018-5941

Stock No:

WPIEA0421991

Format:

Paper

Pages:

28

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