Vulnerability of Currency Pegs: Evidence from Brazil

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Vulnerability of Currency Pegs: Evidence from Brazil

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Bernardo Guimaraes

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Bernardo Guimaraes

Abstract

This paper analyses predictions of a simple model of currency crises in which the peg will beabandoned when the currency overvaluation hits a certain threshold, unknown to the agents.Due to learning about the threshold, some features usually observed in the data and identifiedwith models with multiple equilibria arise in the model. But the model yields distinctivepredictions about the behaviour of the probability and the expected magnitude of a currencydevaluation. The paper identifies the probability and expected magnitude of a devaluation ofBrazilian Real in the period leading up to the end of the Brazilian pegged exchange rateregime, using data on exchange rate options. The empirical results are consistent with modelpredictions.

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Paper provided by Centre for Economic Performance, LSE in its series CEP Discussion Papers with number dp0871.

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Date of creation: Jun 2008
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Handle: RePEc:cep:cepdps:dp0871

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Find related papers by JEL classification:
F3 - International Economics - - International Finance

This paper has been announced in the following NEP Reports:

NEP-ALL-2008-08-31 (All new papers)
NEP-IFN-2008-08-31 (International Finance)
NEP-MON-2008-08-31 (Monetary Economics)

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