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Determining a Modified Currency Board's Two-Period Exchange Rate Strategy

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  • Ying Wu
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Abstract

Is it preferable for a modified currency board (MCB) to disguise its true characteristics and preferences and renege later? This paper analyzes a model in which a MCB determines its first-period exchange rate strategy to maximize a two-period welfare function. The inflation rate anchored by a classical currency board (CCB) is always a benchmark to the MCB in its first period decision. If the benchmark inflation rate is either sufficiently low or sufficiently high, the MCB chooses the optimal exchange rate in both periods without playing a credibility game over time. However, if the benchmark is at a moderate level, a strategy of overtly deceiving the public by pretending to be a CCB is shown to be superior to a strategy of concealing through policy randomization. Copyright International Atlantic Economic Society 2005

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File URL: http://hdl.handle.net/10.1007/s11294-005-2273-9
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Bibliographic Info

Article provided by Springer in its journal International Advances in Economic Research.

Volume (Year): 11 (2005)
Issue (Month): 4 (November)
Pages: 347-357

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Handle: RePEc:kap:iaecre:v:11:y:2005:i:4:p:347-357

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Web page: http://www.springerlink.com/link.asp?id=112112

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Keywords: E42; F32; F41;

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References

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  1. David Backus & John Driffill, 1984. "Inflation and Reputation," Working Papers 560, Queen's University, Department of Economics.
  2. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
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  4. Wu, Ying, 2005. "A modified currency board system: Theory and evidence," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 15(4), pages 353-367, October.
  5. Gerald Caprio & Michael Dooley & Danny Leipziger & Carl Walsh, 1996. "The lender of last resort function under a currency board: The case of Argentina," Open Economies Review, Springer, vol. 7(1), pages 625-650, March.
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  8. Barro, Robert J., 1986. "Reputation in a model of monetary policy with incomplete information," Journal of Monetary Economics, Elsevier, vol. 17(1), pages 3-20, January.
  9. Charles Enoch & Tomás J. T. Baliño, 1997. "Currency Board Arrangements," IMF Occasional Papers 151, International Monetary Fund.
  10. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  11. Anne Marie Gulde, 1999. "The Role of the Currency Board in Bulgaria's Stabilization," IMF Policy Discussion Papers 99/3, International Monetary Fund.
  12. Maurice Obstfeld & Alan M. Taylor, 1998. "The Great Depression as a Watershed: International Capital Mobility over the Long Run," NBER Chapters, in: The Defining Moment: The Great Depression and the American Economy in the Twentieth Century, pages 353-402 National Bureau of Economic Research, Inc.
  13. Carlos E. Zarazaga, 1995. "Argentina, Mexico, and currency boards: another case of rules versus discretion," Economic and Financial Policy Review, Federal Reserve Bank of Dallas, issue Q IV, pages 14-24.
  14. Atish R. Ghosh, 1998. "Currency Boards," IMF Working Papers 98/8, International Monetary Fund.
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Cited by:
  1. Ilina Lilova, 2009. "Impact of the Currency Board System on the course of International Economic Crises," Economic Thought journal, Bulgarian Academy of Sciences - Economic Research Institute, issue 6, pages 70-81.

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