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Currency boards and currency crises

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  • Gregor Irwin
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    Abstract

    This paper demonstrates how a currency board can become vulnerable to a crisis in which the policymaker is forced to devalue. The model is built from two blocks: first, incomplete information about the devaluation cost faced by the policymaker; and second, unemployment persistence. Incomplete information can result in multiple equilibria. In one class of equilibrium the policymaker has a credibility problem and maintaining the currency board is costly in terms of unemployment. If unemployment is persistent then pressure to devalue can build up over time until it becomes unbearable and the policymaker is forced to devalue. Copyright 2004, Oxford University Press.

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    Bibliographic Info

    Article provided by Oxford University Press in its journal Oxford Economic Papers.

    Volume (Year): 56 (2004)
    Issue (Month): 1 (January)
    Pages: 64-87

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    Handle: RePEc:oup:oxecpp:v:56:y:2004:i:1:p:64-87

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    Cited by:
    1. Castrén, Olli & Takalo, Tuomas & Wood, Geoffrey, 2004. "Labour market reform and the sustainability of exchange rate pegs," Working Paper Series, European Central Bank 0406, European Central Bank.
    2. Feuerstein, Switgard & Grimm, Oliver, 2004. "On the Credibility of Currency Boards," Center for European, Governance and Economic Development Research Discussion Papers, University of Goettingen, Department of Economics 36, University of Goettingen, Department of Economics.
    3. Michael Bleaney & Marco Gundermann, 2002. "Stabilisations, Crises and the "Exit" Problem - A Theoretical Model," Macroeconomics, EconWPA 0207003, EconWPA.
    4. Neven T. Valev & John A. Carlson, 2007. "Beliefs about Exchange-Rate Stability: Survey Evidence from the Currency Board in Bulgaria," Journal of Economic Policy Reform, Taylor and Francis Journals, Taylor and Francis Journals, vol. 10(2), pages 111-121.
    5. Feuerstein, Switgard & Grimm, Oliver, 2004. "On the Credibility of Currency Boards," Center for European, Governance and Economic Development Research Discussion Papers, University of Goettingen, Department of Economics 36, University of Goettingen, Department of Economics.
    6. Katsimi, Margarita, 2008. "Exchange rate strategies towards the euro-zone for new EU member states with currency boards," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(3), pages 1043-1063, September.
    7. João Loureiro & Manuel M. F. Martins & Ana Paula Ribeiro, 2009. "Cape Verde: The Case for Euroization," FEP Working Papers, Universidade do Porto, Faculdade de Economia do Porto 317, Universidade do Porto, Faculdade de Economia do Porto.
    8. Oliver Grimm, 2007. "Fiscal Discipline and Stability under Currency Board Systems," CER-ETH Economics working paper series, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich 07/66, CER-ETH - Center of Economic Research (CER-ETH) at ETH Zurich.

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