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Partial Delegation in a Model of Currency Crisis

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  • Virginie Boinet

Abstract

This paper shows that, in a fixed exchange‐rate system with an escape clause, delegating the decision on the magnitude of realignment to an inflation‐averse central banker reduces the range of realignment costs for which the policy‐maker necessarily devalues. Stressing the influence of devaluation expectations on currency crises, it is also shown that this strategy of delegation reduces the width of the multiple equilibria zone within which self‐fulfilling crises occur, thus promoting further the exchange‐rate system's stability. The higher the central banker's degree of inflation aversion, the greater is this reduction.

Suggested Citation

  • Virginie Boinet, 2003. "Partial Delegation in a Model of Currency Crisis," Bulletin of Economic Research, Wiley Blackwell, vol. 55(4), pages 347-355, October.
    • Handle: RePEc:bla:buecrs:v:55:y:2003:i:4:p:347-355
    DOI: 10.1111/1467-8586.00180
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    References listed on IDEAS

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    6. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
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