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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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File URL: http://econwpa.repec.org/eps/mac/papers/0207/0207003.pdf
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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
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
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  17. Allan Drazen, 2000. "Political Contagion in Currency Crises," NBER Chapters, in: Currency Crises, pages 47-67 National Bureau of Economic Research, Inc.
  18. 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.
  19. Sebastian Edwards, 2001. "Exchange Rate Regimes, Capital Flows and Crisis Prevention," NBER Working Papers 8529, National Bureau of Economic Research, Inc.
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