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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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Web page: https://mpra.ub.uni-muenchen.de

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  11. Crowe, Christopher & Meade, Ellen E., 2008. "Central bank independence and transparency: Evolution and effectiveness," European Journal of Political Economy, Elsevier, vol. 24(4), pages 763-777, December.
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  22. Massimo Sbracia & Andrea Zaghini, 2000. "Expectations and Information in Second Generation Currency Crises Models," Econometric Society World Congress 2000 Contributed Papers 0462, Econometric Society.
  23. Wilson, Berry & Saunders, Anthony, 2004. "Monetary secrecy and selective disclosure: The emerging market case of Mexico's monetary reporting," Review of Financial Economics, Elsevier, vol. 13(1-2), pages 199-210.
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  25. Enrique G. Mendoza, 2001. "Credit, Prices, and Crashes: Business Cycles with a Sudden Stop," NBER Working Papers 8338, National Bureau of Economic Research, Inc.
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  28. Giannetti, Mariassunta, 2007. "Financial liberalization and banking crises: The role of capital inflows and lack of transparency," Journal of Financial Intermediation, Elsevier, vol. 16(1), pages 32-63, January.
  29. Siklos, Pierre L., 2000. "Monetary policy transparency, public commentary, and market perceptions about monetary policy in Canada," Discussion Paper Series 1: Economic Studies 2000,08, Deutsche Bundesbank, Research Centre.
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