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Stabilisations, Crises and the "Exit" Problem - A Theoretical Model

  • Michael Bleaney

    (University of Nottingham)

  • Marco Gundermann

    (University of Nottingham)

Exchange-rate-based stabilisations, even if successful, usually lack credibility initially. This is reflected in high (ex post) real interest rates and some degree of real exchange rate appreciation. Empirical observation suggests that wage inflation declines smoothly over time whilst interest rates are volatile. We capture this by assuming that expectations are formed adaptively in labour markets, but rationally in financial markets. The model provides insights into: the eruption of exchange rate crises after a long period of apparently successful stabilisation; the potential advantages of a heterodox approach; when to delay a stabilisation attempt; and the optimal date for ''exit'' to a floating exchange rate.

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Paper provided by EconWPA in its series Macroeconomics with number 0207003.

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Length: 31 pages
Date of creation: 05 Jul 2002
Date of revision:
Handle: RePEc:wpa:wuwpma:0207003
Note: Type of Document - pdf; prepared on PC; to print on probably A4; pages: 31. based on earlier discussion paper
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  1. Calvo, Guillermo A. & Vegh, Carlos A., 1999. "Inflation stabilization and bop crises in developing countries," Handbook of Macroeconomics, in: J. B. Taylor & M. Woodford (ed.), Handbook of Macroeconomics, edition 1, volume 1, chapter 24, pages 1531-1614 Elsevier.
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  14. Fielding, David & Bleaney, Michael, 2000. "Monetary Discipline and Inflation in Developing Countries: The Role of the Exchange Rate Regime," Oxford Economic Papers, Oxford University Press, vol. 52(3), pages 521-38, July.
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  19. Gregor Irwin, 2004. "Currency boards and currency crises," Oxford Economic Papers, Oxford University Press, vol. 56(1), pages 64-87, January.
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