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research articles : Devaluation of fixed exchange rates: optimal strategy in the presence of speculation

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Author Info
Ivan Pastine () (Economics Department, Bilkent University, 06533 Bilkent, Ankara, TURKEY)

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Abstract

This paper analyzes devaluations in a fixed exchange rate system by endogenizing both the speculation and devaluation decisions. It is shown that deterministic devaluation rules are generally sub-optimal for the central bank. In order to deter speculation the central bank introduces uncertainty into the timing of devaluation. The nature this mixed strategy is derived, as is the optimal strategy for speculators. The analysis allows an explanation of successful devaluations that are not precipitated by a speculative attacks, even under perfect capital mobility.

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Publisher Info
Article provided by Springer in its journal Economic Theory.

Volume (Year): 15 (2000)
Issue (Month): 3 ()
Pages: 631-661
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Handle: RePEc:spr:joecth:v:15:y:2000:i:3:p:631-661

Note: Received: May 17, 1999; revised version: June 2, 1999
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Related research
Keywords: Speculative attack; Optimising balance-of-payments crises.;

Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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