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Collapse of a Crawling Peg Regime in the Presence of a Government Budget Constraint

  • Miguel A. Savastano

    (International Monetary Fund)

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    The dynamics of the collapse of a crawling exchange rate in the presence of an explicit link between the fiscal deficit and domestic credit is investigated. Such an exchange rate regime is generally characterized by two potential steady-state equilibria, which introduce an ex ante indeterminacy in the timing and magnitude of a speculative attack on international reserves in the presence of a sustained inconsistency between the country's fiscal and exchange rate policies. The paper discusses the conditions that define the actual timing of the regime's breakdown.

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    Article provided by Palgrave Macmillan in its journal Staff Papers - International Monetary Fund.

    Volume (Year): 39 (1992)
    Issue (Month): 1 (March)
    Pages: 79-100

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    Handle: RePEc:pal:imfstp:v:39:y:1992:i:1:p:79-100
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