Collapse of a Crawling Peg Regime in the Presence of a Government Budget Constraint
April 1, 1991
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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.
Subject: Domestic credit, Exchange rate arrangements, Exchange rate policy, Government debt management, Managed exchange rates
Keywords: central bank, government, rate of depreciation, WP
Pages:
28
Volume:
1991
DOI:
Issue:
042
Series:
Working Paper No. 1991/042
Stock No:
WPIEA0421991
ISBN:
9781451846140
ISSN:
1018-5941
Notes
Also published in Staff Papers, Vol. 39, No. 1, March 1992.
