Stabilisations, Crises and the "Exit" Problem - A Theoretical Model
AbstractExchange-rate-based stabilisations, even if successful, usually lack credibility initially. This is reflected in high (ex post) real interest rates and some degree of real exchange rate appreciation. Empirical observation suggests that wage inflation declines smoothly over time whilst interest rates are volatile. We capture this by assuming that expectations are formed adaptively in labour markets, but rationally in financial markets. The model provides insights into: the eruption of exchange rate crises after a long period of apparently successful stabilisation; the potential advantages of a heterodox approach; when to delay a stabilisation attempt; and the optimal date for ''exit'' to a floating exchange rate.
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Bibliographic InfoPaper provided by EconWPA in its series Macroeconomics with number 0207003.
Length: 31 pages
Date of creation: 05 Jul 2002
Date of revision:
Note: Type of Document - pdf; prepared on PC; to print on probably A4; pages: 31. based on earlier discussion paper
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credibility; currency crisis; exchange rate; stabilisation; inflation reduction; adaptive expectations; rational expectations; real overvaluation effects;
Other versions of this item:
- Bleaney, Michael & Gundermann, Marco, 2007. "Stabilizations, crises and the "exit" problem - A theoretical model," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 876-890, December.
- E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
- F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
This paper has been announced in the following NEP Reports:
- NEP-ALL-2002-07-31 (All new papers)
- NEP-IFN-2002-07-31 (International Finance)
- NEP-LAM-2002-07-31 (Central & South America)
- NEP-MAC-2002-07-31 (Macroeconomics)
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