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Self-Fulfilling Currency Crises and Central Bank Independence

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  • Bensaid, Bernard
  • Jeanne, Olivier

Abstract

We develop a model of a fixed exchange rate peg arrangement derived from the Barro-Gordon model of rules versus discretion. It is shown that the fixed peg is vulnerable to self-fulfilling currency crises in which the unemployment rate increases, the credibility of the rule decreases, but, paradoxically, the reputation of the policy-maker improves. Delegating monetary policy to an independent central banker does not prevent this type of crisis from arising, and can even make it more costly. Copyright 2000 by The editors of the Scandinavian Journal of Economics.

Suggested Citation

  • Bensaid, Bernard & Jeanne, Olivier, 2000. " Self-Fulfilling Currency Crises and Central Bank Independence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 605-620, December.
  • Handle: RePEc:bla:scandj:v:102:y:2000:i:4:p:605-20
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    Cited by:

    1. Richard S. Grossman & Christopher M. Meissner, 2010. "International aspects of the Great Depression and the crisis of 2007: similarities, differences, and lessons," Oxford Review of Economic Policy, Oxford University Press, vol. 26(3), pages 318-338, Autumn.
    2. Berger, Wolfram & Kißmer, Friedrich, 2013. "Central bank independence and financial stability: A tale of perfect harmony?," European Journal of Political Economy, Elsevier, vol. 31(C), pages 109-118.
    3. Christian Bauer & Bernhard Herz, 2006. "Monetary and Exchange Rate Stability at the EU. Mediterranean Borders," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 899-917.

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