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When pegging is a commitment device: Revisiting conventional wisdom about currency crises

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  • Tarashev, Nikola
  • Zabai, Anna

Abstract

Could a less conservative central bank, that is, one with a smaller aversion to inflation, be more likely to withstand pressure on its currency peg? Traditional currency-crisis models provide an unambiguous answer: No. We argue that this answer stems from the models' narrow focus on how a central bank's resistance to private-sector pressure affects output and inflation in the short run. The answer may reverse if pegging is a commitment device, serving to address domestic credibility issues in the long run by transferring the conduct of monetary policy abroad. As a less conservative central bank stands to benefit more from such a transfer, it should find a peg more valuable.

Suggested Citation

  • Tarashev, Nikola & Zabai, Anna, 2019. "When pegging is a commitment device: Revisiting conventional wisdom about currency crises," Journal of International Economics, Elsevier, vol. 118(C), pages 233-247.
  • Handle: RePEc:eee:inecon:v:118:y:2019:i:c:p:233-247
    DOI: 10.1016/j.jinteco.2019.02.001
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    More about this item

    Keywords

    Currency crises; Inflation bias; Intertemporal trade-offs; Global games;

    JEL classification:

    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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