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Determining a Modified Currency Board's Two-Period Exchange Rate Strategy

  • Ying Wu
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Is it preferable for a modified currency board (MCB) to disguise its true characteristics and preferences and renege later? This paper analyzes a model in which a MCB determines its first-period exchange rate strategy to maximize a two-period welfare function. The inflation rate anchored by a classical currency board (CCB) is always a benchmark to the MCB in its first period decision. If the benchmark inflation rate is either sufficiently low or sufficiently high, the MCB chooses the optimal exchange rate in both periods without playing a credibility game over time. However, if the benchmark is at a moderate level, a strategy of overtly deceiving the public by pretending to be a CCB is shown to be superior to a strategy of concealing through policy randomization. Copyright International Atlantic Economic Society 2005

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File URL: http://hdl.handle.net/10.1007/s11294-005-2273-9
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Article provided by International Atlantic Economic Society in its journal International Advances in Economic Research.

Volume (Year): 11 (2005)
Issue (Month): 4 (November)
Pages: 347-357

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Handle: RePEc:kap:iaecre:v:11:y:2005:i:4:p:347-357
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