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Public debt and currency crisis: how central bank opacity can make things bad?

  • Dai, Meixing

This paper examines how the transparency in monetary policy decision can impact the likelihood of currency crisis in a simple open economy model with public debt. In the presence of opacity, it is found that if the debt is high, the government will devaluate and vice versa, and the self-fulfilling multiple equilibria solution disappears. Furthermore, the opacity reduces the threshold of public debt above which the government is considered as totally lacking the credibility in its pre-commitment to maintain fixed the exchange rate.

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File URL: https://mpra.ub.uni-muenchen.de/13867/1/MPRA_paper_13867.pdf
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Paper provided by University Library of Munich, Germany in its series MPRA Paper with number 13867.

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Date of creation: Dec 2008
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Publication status: Published in Economics Bulletin 1.29(2009): pp. 190-198
Handle: RePEc:pra:mprapa:13867
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  19. Courtenay, Roger & Clare, Andrew, 2001. "What can we learn about monetary policy transparency from financial market data?," Discussion Paper Series 1: Economic Studies 2001,06, Deutsche Bundesbank, Research Centre.
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