A Model of the ERM Crisis
AbstractExisting models of exchange rate crises do not provide a good explanation for the breakdown of the ERM in 1992 3. This paper presents an alternative model which captures some of the important features of that period. The switch from a fixed to a floating rate is triggered by an optimizing government that wants to loosen monetary policy and boost aggregate demand. Agents in the foreign exchange market know the government's objective function and therefore build expectations of a regime switch into interest differentials. It is shown that this interaction between private sector expectations and government preferences can imply a breakdown of the fixed rate sooner than the government would like.
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Bibliographic InfoPaper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 879.
Date of creation: Jan 1994
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Other versions of this item:
- F. Gulcin Ozkan & Alan Sutherland, . "A Model of the ERM Crisis," EPRU Working Paper Series 93-09, Economic Policy Research Unit (EPRU), University of Copenhagen. Department of Economics.
- F Gulcin Ozkan & Alan Sutherland, . "A Model of the ERM Crisis," Discussion Papers 94/2, Department of Economics, University of York.
- F31 - International Economics - - International Finance - - - Foreign Exchange
- F32 - International Economics - - International Finance - - - Current Account Adjustment; Short-term Capital Movements
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