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The Politics of Surprise Devaluations: Modelling Motives for Giving Up a Peg

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  • Bohn Frank

    (Radboud University Nijmegen, IMR, Department of Economics, P.O. Box 9108, 6500 HK Nijmegen, The Netherlands)

Abstract

Planned ‘‘surprise’’ devaluations are often spurred by non-economic circumstances: a rentseeking government; political instability; or the opportunity to put the blame on a predecessor government. In this paper, these aspects are incorporated in the monetary and fiscal policy framework first suggested by Alesina and Tabellini (1987). It is shown that reneging on a fixed exchange rate promise unambiguously produces short term benefits, but long run losses. This leads to a non-straightforward trade-off between greediness (propensity for expropriation) and political stability (which implies a low time preference). The findings are empirically relevant and theoretically robust to extensions.

Suggested Citation

  • Bohn Frank, 2013. "The Politics of Surprise Devaluations: Modelling Motives for Giving Up a Peg," Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), De Gruyter, vol. 233(5-6), pages 562-574, October.
    • Handle: RePEc:jns:jbstat:v:233:y:2013:i:5-6:p:562-574
    DOI: 10.1515/jbnst-2013-5-602
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