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Policy Implications of "Second-Generation" Crisis Models

Author

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  • Nancy P. Marion
  • Robert P Flood

Abstract

After the speculative attacks on government-controlled exchange rates in Europe and in Mexico, economists began to develop models of currency crises with multiple solutions. In these models, a currency crisis occurs when the economy suddenly jumps from one solution to another. This paper examines one of the new models, finding that raising the cost of devaluation may make a crisis more likely. Consequently, slow convergence to a monetary union, which increases the cost to the government of reneging on an exchange rate peg, may be counterproductive. This conclusion is exactly the opposite of that obtained from earlier models.

Suggested Citation

  • Nancy P. Marion & Robert P Flood, 1997. "Policy Implications of "Second-Generation" Crisis Models," IMF Working Papers 97/16, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:97/16
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    References listed on IDEAS

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    Cited by:

    1. Mundaca,B.G. & Strand,J., 1999. "Speculative attacks in the exchange market with a band policy : a sequential game analysis," Memorandum 01/1999, Oslo University, Department of Economics.
    2. Stijn Claessens & M. Ayhan Kose, 2013. "Financial Crises: Explanations, Types and Implications," CAMA Working Papers 2013-06, Centre for Applied Macroeconomic Analysis, Crawford School of Public Policy, The Australian National University.
    3. M. Isabel Campos López & M. Araceli Rodríguez López, "undated". "Business Cycle Speculative Pressures in a Target Zone," Working Papers on International Economics and Finance 01-04, FEDEA.
    4. Mark P. Taylor & Lucio Sarno, 2001. "Official Intervention in the Foreign Exchange Market: Is It Effective and, If So, How Does It Work?," Journal of Economic Literature, American Economic Association, pages 839-868.
    5. International Monetary Fund, 2002. "Financial Crises, Poverty, and Income Distribution," IMF Working Papers 02/4, International Monetary Fund.

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