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Default, Electoral Uncertainty and the Choice of Exchange Regime

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  • Hefeker, Carsten

Abstract

The paper explores the interaction between debt crises and devaluation. Since the optimal level of devaluation in a crisis depends on the level of debt that has to be serviced, a default makes a devaluation less likely. Expected devaluation depends thus on expectations about default which is also a function of the type of policymaker. Therefore, the decision to devalue can be forced upon the government by adverse expectations about default and the type of policymaker in office. I also explore how these uncertainties affect the policymaker?s choice of exchange rate regime. --

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Bibliographic Info

Paper provided by Hamburg Institute of International Economics (HWWA) in its series HWWA Discussion Papers with number 298.

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Date of creation: 2004
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Handle: RePEc:zbw:hwwadp:298

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Keywords: debt crisis; currency crisis; exchange rate regime;

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