Policy Implications of "Second-Generation" Crisis Models
February 1, 1997
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Summary
After the speculative attacks on government-controlled exchange rates in Europe and in Mexico, economists began to develop models of currency crises with multiple solutions. In these models, a currency crisis occurs when the economy suddenly jumps from one solution to another. This paper examines one of the new models, finding that raising the cost of devaluation may make a crisis more likely. Consequently, slow convergence to a monetary union, which increases the cost to the government of reneging on an exchange rate peg, may be counterproductive. This conclusion is exactly the opposite of that obtained from earlier models.
Subject: Conventional peg, Currencies, Exchange rate adjustments, Exchange rate devaluation, Exchange rates, Foreign exchange, Money
Keywords: Conventional peg, cost of devaluation, Currencies, devaluation, devaluation model, devaluation of the currency, Europe, exchange rate, Exchange rate adjustments, Exchange rate devaluation, Exchange rates, price level, second-generation model, WP
Pages:
11
Volume:
1997
DOI:
Issue:
016
Series:
Working Paper No. 1997/016
Stock No:
WPIEA0161997
ISBN:
9781451843361
ISSN:
1018-5941
