Collapsing exchange rate regimes: a reinterpretation
Microfoundations are provided for a common model of balance of payments crises by showing formal equivalence to a standard overlapping generations model. Certain domestic policy rules are inconsistent with fixed exchange rate equilibrium, which is in agreement with previous results. However, when policy is consistent with a fixed exchange rate equilibrium (1) there are multiple stationary equilibria, and the fixed exchange rate equilibrium is generally unstable under rational expectations; (2) the fixed exchange rate equilibrium is the attractor when agents learn over time; (3) complicated exchange rate paths cannot be ruled out by utility maxirnazation and rational expectations alone.
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