Learning and Inflation Convergence in the ERM
AbstractThis paper develops a model where agents learn about the probability of devaluations in a fixed exchange rate regim e. The true probability of devaluation is assumed to be low (or zero) b ut agents are initially unsure about the government's intentions and st art with a high prior belief. Bayesian updating dictates that private sector expectations are revised down during periods when no devaluat ion occurs, but are sharply increased when a devaluation does occur. Thi s model of learning is embedded in a model of overlapping contracts to study the process of inflation convergence after ERM entry. The main results are that agents over-estimate the authorities' desired realignment rate, so inflation will be high in anticipation; but as the authorities do not actually devalue, there is a terms of trade loss leading to recession. Before long-run equilibrium in which agents correctly estimate realignment rates can be attained, competitivenes s losses actually have to be regained by a sustained deflation. Copyright 1993 by Royal Economic Society.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
As the access to this document is restricted, you may want to look for a different version under "Related research" (further below) or search for a different version of it.
Bibliographic InfoArticle provided by Royal Economic Society in its journal The Economic Journal.
Volume (Year): 103 (1993)
Issue (Month): 417 (March)
Contact details of provider:
Postal: Office of the Secretary-General, School of Economics and Finance, University of St. Andrews, St. Andrews, Fife, KY16 9AL, UK
Phone: +44 1334 462479
Web page: http://www.res.org.uk/
More information through EDIRC
You can help add them by filling out this form.
CitEc Project, subscribe to its RSS feed for this item.
- Carmignani, Fabrizio & Colombo, Emilio & Tirelli, Patrizio, 2008. "Exploring different views of exchange rate regime choice," Journal of International Money and Finance, Elsevier, vol. 27(7), pages 1177-1197, November.
- Mason, Robin & Välimäki, Juuso, 2011. "Learning about the arrival of sales," Journal of Economic Theory, Elsevier, vol. 146(4), pages 1699-1711, July.
- Horii, Ryo & Ono, Yoshiyasu, 2009. "Information Cycles and Depression in a Stochastic Money-in-Utility Model," MPRA Paper 13485, University Library of Munich, Germany.
- Ascari, Guido & Rankin, Neil, 2002.
"Staggered wages and output dynamics under disinflation,"
Journal of Economic Dynamics and Control,
Elsevier, vol. 26(4), pages 653-680, April.
- Ascari, G. & Rankin, N., 2000. "Staggered Wages and Output Dynamics under Disinflation," The Warwick Economics Research Paper Series (TWERPS) 557, University of Warwick, Department of Economics.
- Ryo Horii & Yoshiyasu Ono, 2004. "Learning, Liquidity Preference, and Business Cycle," ISER Discussion Paper 0601, Institute of Social and Economic Research, Osaka University.
- Ryo Horii & Yoshiyasu Ono, 2005. "Financial Crisis and Recovery: Learning-based Liquidity Preference Fluctuations," Macroeconomics 0504016, EconWPA.
- Fabrizio Carmignani & Emilio Colombo & Patrizio Tirelli, 2005.
"Consistency versus credibility: how do countries choose their exchange rate regime?,"
- Fabrizio Carmignani & Emilio Colombo & Patrizio Tirelli, 2004. "Consistency versus credibility: how do countries choose their exchange rate regime?," Working Papers 85, University of Milano-Bicocca, Department of Economics, revised Feb 2005.
- Zhang, Lei & Marcus Miller & Kannika Thampanishvong, 2003.
"Learning to Forget? Contagion and Political Risk in Brazil,"
Royal Economic Society Annual Conference 2003
227, Royal Economic Society.
- Miller, Marcus & Thampanishvong, Kannika & Zhang, Lei, 2003. "Learning to Forget? Contagion and Political Risk in Brazil," CEPR Discussion Papers 3785, C.E.P.R. Discussion Papers.
- Christodoulakis, Nicos M. & Kalyvitis, Sarantis C., 1997. "Efficiency testing revisited: a foreign exchange market with Bayesian learning," Journal of International Money and Finance, Elsevier, vol. 16(3), pages 367-385, June.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Wiley-Blackwell Digital Licensing) or (Christopher F. Baum).
If references are entirely missing, you can add them using this form.