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Public debt and currency crisis: how central bank opacity can make things bad?

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  • Dai, Meixing

Abstract

This paper examines how the transparency in monetary policy decision can impact the likelihood of currency crisis in a simple open economy model with public debt. In the presence of opacity, it is found that if the debt is high, the government will devaluate and vice versa, and the self-fulfilling multiple equilibria solution disappears. Furthermore, the opacity reduces the threshold of public debt above which the government is considered as totally lacking the credibility in its pre-commitment to maintain fixed the exchange rate.

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File URL: http://mpra.ub.uni-muenchen.de/13867/
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Bibliographic Info

Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13867.

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Date of creation: Dec 2008
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Publication status: Published in Economics Bulletin 1.29(2009): pp. 190-198
Handle: RePEc:pra:mprapa:13867

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Keywords: central bank transparency; public debt; currency crisis; speculative attack;

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Cited by:
  1. Meixing Dai, 2009. "Models of currency crises with self-fulfilling features: A comment," Working Papers of BETA 2009-14, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

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