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When pegging ties your hands

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  • Nikola Tarashev
  • Anna Zabai

Abstract

Could a less conservative central bank - one that faces a more severe time inconsistency problem - be less likely to succumb to an attack on a currency peg? Traditional currency-crisis models provide a firm answer: No. We argue that the answer stems from these models' narrow focus on how a central bank's response to a speculative attack affects output and inflation in the short run. The answer may reverse if we recognize that a credible currency peg solves time consistency issues in the long run. As a less conservative central bank stands to benefit more from tying its own hands, it should find a peg more valuable.

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  • Nikola Tarashev & Anna Zabai, 2016. "When pegging ties your hands," BIS Working Papers 547, Bank for International Settlements.
  • Handle: RePEc:bis:biswps:547
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    References listed on IDEAS

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    1. Bruno Biais & Fany Declerck & Sophie Moinas, 2016. "Who supplies liquidity, how and when?," BIS Working Papers 563, Bank for International Settlements.
    2. Andrew W Lo, 2016. "Moore's Law vs. Murphy's Law in the financial system: who's winning?," BIS Working Papers 564, Bank for International Settlements.

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    Keywords

    currency crises; strategic uncertainty; global games; time inconsistency;
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