Stabilisations, Crises and the "Exit" Problem - A Theoretical Model

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Stabilisations, Crises and the "Exit" Problem - A Theoretical Model

Author Info

Michael Bleaney (University of Nottingham)
Marco Gundermann (University of Nottingham)

Additional information is available for the following registered author(s):

Marco Gundermann

Abstract

Exchange-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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Paper provided by EconWPA in its series Macroeconomics with number 0207003.

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Length: 31 pages
Date of creation: 05 Jul 2002
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Handle: RePEc:wpa:wuwpma:0207003

Note: Type of Document - pdf; prepared on PC; to print on probably A4; pages: 31. based on earlier discussion paper
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Article
- 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. [Downloadable!] (restricted)

Find related papers by JEL classification:
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)

References listed on IDEAS
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Other versions:
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