Multiple Equilibria and the Credibility of the Brazilian "Crawling Peg", 1995-1998
AbstractThis paper studies the relationship between the probability of devaluation of the Brazilian real and the fundamentals of the economy for the period 1995-1998. We use a model of a fixed exchange rate system that allows for multiple equilibria and, therefore, makes possible the identification of self-fulfilling speculation. The devaluation probability is computed using the "drift adjustment method". The model performs satisfactorily in tracking monthly devaluation expectations and presents some important advantages over a simple linear regression of macroeconomic variables on the devaluation probability. We do not find evidence that self-fulfilling speculation was at work in the period preceding the Brazilian currency crisis of January 1999. This suggests that the breakdown of the Brazilian managed exchange rate system was due to the deterioration of the fundamentals of the economy.
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Bibliographic InfoPaper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën in its series Center for Economic Studies - Discussion papers with number ces9919.
Date of creation: Nov 1999
Date of revision:
Currency crisis; self-fulfilling speculation; multiple equilibria; Brazilian exchange rate system.;
Other versions of this item:
- Lyrio, Marco & Dewachter, Hans, 2000. "Multiple Equilibria and the Credibility of the Brazilian 'Crawling Peg,' 1995-1998," International Finance, Wiley Blackwell, vol. 3(1), pages 1-23, April.
- Hans Dewachter & Marco Lyrio, 1999. "Multiple Equilibria and the Credibility of the Brazilian 'Crawling-Peg', 1995-1998," International Economics Working Papers Series ces9919, Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics.
- F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
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