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Multiple Equilibria and the Credibility of the Brazilian 'Crawling-Peg', 1995-1998

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Author Info

  • Hans Dewachter

    ()
    (K.U.Leuven and Erasmus University of Rotterdam)

  • Marco Lyrio

    ()
    (K.U.Leuven, C.E.S., International Economics)

Abstract

This 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 Info

Paper provided by Katholieke Universiteit Leuven, Centrum voor Economische Studiën, International Economics in its series International Economics Working Papers Series with number ces9919.

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Length: 28 pages
Date of creation: Nov 1999
Date of revision:
Handle: RePEc:kul:kulwps:ces9919

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Keywords: currency crisis; self-fulfilling speculation; multiple equilibria; Brazilian exchange rate system;

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