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Speculative attacks on debts and optimum currency area: A welfare analysis

  • Araújo, Aloísio Pessoa de
  • Leon, Márcia Saraiva

Resorting to an extension of the debt crisis model of Cole and Kehoe (JIE 1996), we evaluate financial aspects of an optimum currency area. Our focus is to appraise the welfare of a country, which belongs to a monetary union and might suffer a speculative attack on its public debt. A default may be avoided by an inflation tax on common-currency debt, but this decision depends on majority voting and have costs associated with it. Moreover, the model considers symmetry between national and central governments' decisions about inflation and also describes the loss in international bankers' confidence towards one country being passed on to another. One of our results is that, for a country with low weight in the voting system, common-currency regime is superior in terms of expected welfare to dollarization and may be a better choice than the local-currency one, as the central bank under the latter regime undergoes some political influence from its government.

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Paper provided by FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil) in its series Economics Working Papers (Ensaios Economicos da EPGE) with number 514.

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Date of creation: 14 Nov 2003
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Handle: RePEc:fgv:epgewp:514
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  1. Alesina, Alberto F & Grilli, Vittorio, 1991. "The European Central Bank: Reshaping Monetary Politics in Europe," CEPR Discussion Papers 563, C.E.P.R. Discussion Papers.
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  3. Charles Lima de Almeida & Marco Aurélio Peres & Geraldo da Silva e Souza & Benjamin Miranda Tabak, 2003. "Optimal Monetary Rules: The Case of Brazil," Working Papers Series 63, Central Bank of Brazil, Research Department.
  4. Benjamin Miranda Tabak & Solange Maria Guerra, 2002. "Stock Returns and Volatility," Working Papers Series 54, Central Bank of Brazil, Research Department.
  5. Paulo Coutinho & Benjamin Miranda Tabak, 2002. "Delegated Portfolio Management," Working Papers Series 60, Central Bank of Brazil, Research Department.
  6. repec:fgv:epgrbe:v:58:n:4:a:3 is not listed on IDEAS
  7. Pedro H. Albuquerque, 2000. "An Information Theory Approach to the Aggregation of Log-Linear Models," Working Papers Series 4, Central Bank of Brazil, Research Department.
  8. Mauro Costa Miranda, 2001. "Crises Cambiais e Ataques Especulativos no Brasil," Working Papers Series 32, Central Bank of Brazil, Research Department.
  9. Fajardo, J. & Farias, A., 2003. "Generalized Hyperbolic Distributions and Brazilian Data," Finance Lab Working Papers flwp_57, Finance Lab, Insper Instituto de Ensino e Pesquisa.
  10. Arnildo da Silva Correa, 2003. "Diferenças e Semelhanças entre Países da América Latina: Uma Análise de Markov Switching para os Ciclos Econômicos de Brasil e Argentina," Working Papers Series 80, Central Bank of Brazil, Research Department.
  11. Benjamin Miranda Tabak, 2003. "Monetary Policy Surprises and the Brazilian Term Structure of Interest Rates," Working Papers Series 70, Central Bank of Brazil, Research Department.
  12. Marcelle Chauvet, 2000. "Leading Indicators of Inflation for Brazil," Working Papers Series 7, Central Bank of Brazil, Research Department.
  13. Emanuel-Werner Kohlscheen, 2000. "Estimating Exchange Market Pressure and Intervention Activity," Working Papers Series 9, Central Bank of Brazil, Research Department.
  14. Paulo Coutinho & Benjamin Miranda Tabak, 2001. "Decentralized Portfolio Management," Working Papers Series 22, Central Bank of Brazil, Research Department.
  15. Pedro H. Albuquerque, 2005. "Os Impactos Econômicos da CPMF: Teoria e Evidência," Public Economics 0511020, EconWPA, revised 26 Nov 2005.
  16. Francisco Marcos Rodrigues Figueiredo, 2001. "Evaluating Core Inflation Measures for Brazil," Working Papers Series 14, Central Bank of Brazil, Research Department.
  17. Sandro Canesso de Andrade & Benjamin Miranda Tabak, 2001. "Is it Worth Tracking Dollar/Real Implied Volatility?," Working Papers Series 15, Central Bank of Brazil, Research Department.
  18. Thomas Y. Wu, 2004. "Does Inflation Targeting Reduce Inflation? An Analysis for the OECD Industrial Countries," Working Papers Series 83, Central Bank of Brazil, Research Department.
  19. Victorio Y. T. Chu & Márcio I. Nakane, 2001. "Credit Channel without the LM Curve," Working Papers Series 20, Central Bank of Brazil, Research Department.
  20. Eduardo Lundberg, 2000. "Monetary Policy and Banking Supervision Functions on the Central Bank," Working Papers Series 2, Central Bank of Brazil, Research Department.
  21. Benjamin Miranda Tabak & Sandro Canesso de Andrade, 2001. "Testing the Expectations Hypothesis in the Brazilian Term Structure of Interest Rates," Working Papers Series 30, Central Bank of Brazil, Research Department.
  22. Marcelo Kfoury Muinhos & Sérgio Afonso Lago Alves & Gil Riella, 2002. "Modelo Estrutural com Setor Externo: Endogenização do Prêmio de Risco e do Câmbio," Working Papers Series 42, Central Bank of Brazil, Research Department.
  23. Leonardo Soriano de Alencar & Márcio I. Nakane, 2004. "Bank Competition, Agency Costs and the Performance of the Monetary Policy," Working Papers Series 81, Central Bank of Brazil, Research Department.
  24. Francisco Marcos R. Figueiredo & Thaís Porto Ferreira, 2002. "Os Preços Administrados e a Inflação no Brasil," Working Papers Series 59, Central Bank of Brazil, Research Department.
  25. Leonardo Soriano de Alencar & Márcio I. Nakane, 2003. "Real Balances in the Utility Function: Evidence for Brazil," Working Papers Series 68, Central Bank of Brazil, Research Department.
  26. repec:fgv:epgrbe:v:56:n:1:a:1 is not listed on IDEAS
  27. Benjamin Miranda Tabak, 2003. "On the Information Content of Oil Future Prices," Working Papers Series 65, Central Bank of Brazil, Research Department.
  28. Benjamin Miranda Tabak & Eduardo José Araújo Lima, 2002. "Causality and Cointegration in Stock Markets: The Case of Latin America," Working Papers Series 56, Central Bank of Brazil, Research Department.
  29. Araújo, Aloisio Pessoa de & Leon, Márcia Saraiva, 2002. "Ataques Especulativos sobre Dívidas e Dolarização," Revista Brasileira de Economia, FGV/EPGE Escola Brasileira de Economia e Finanças, Getulio Vargas Foundation (Brazil), vol. 56(1), January.
  30. Francisco Marcos R. Figueiredo & Roberta Blass Staub, 2001. "Algumas Considerações Sobre a Sazonalidade no IPCA," Working Papers Series 31, Central Bank of Brazil, Research Department.
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