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Multiple Equilibria and the Credibility of the Brazilian ‘Crawling Peg’, 1995–1998

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  • Marco Lyrio
  • Hans Dewachter

Abstract

This paper studies the relationship between the probability of devaluation of the Brazilian real and the fundamentals of the economy for the period 1995–8. We use a model of a fixed exchange rate system that allows for multiple equilibria and, therefore, makes possible the identification of self‐fulfilling speculation. We do not find evidence that self‐fulfilling speculation was at work in the period preceding the Brazilian currency crisis of January 1999. This indicates that the breakdown of the Brazilian managed exchange rate system was due to the deterioration of the fundamentals of the economy. Our results bring back to the fore the relevance of international reserves in defending exchange rate pegs in emerging market economies. We also show the importance of focusing on the degree of responsiveness of the market to changes in the fundamental and on a respective ‘vulnerable range’ for the cases where multiple equilibria are not possible.

Suggested Citation

  • Marco Lyrio & Hans Dewachter, 2000. "Multiple Equilibria and the Credibility of the Brazilian ‘Crawling Peg’, 1995–1998," International Finance, Wiley Blackwell, vol. 3(1), pages 1-23, April.
    • Handle: RePEc:bla:intfin:v:3:y:2000:i:1:p:1-23
    DOI: 10.1111/1468-2362.00040
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    Cited by:

    1. Marcin Sasin, 2002. "Predicting Currency Crises, the Ultimate Significance of Macroeconomic Fundamentals in Linear Specifications with Nonlinear Extensions," CASE Network Studies and Analyses 0224, CASE-Center for Social and Economic Research.

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    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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