Stabilizations, crises and the "exit" problem - A theoretical model

Michael Bleaney, Marco Gundermann

Research output: Contribution to Book/ReportChapterpeer-review

Abstract

Exchange-rate-based stabilizations, 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. Our model captures these features and provides insights into: the eruption of exchange rate crises after a long period of apparently successful stabilization; the potential advantages of a heterodox approach; when to delay a stabilization attempt; and the optimal date for "exit" to a floating exchange rate. © 2007 Elsevier Inc. All rights reserved.
Original languageEnglish
Title of host publicationJournal of Macroeconomics
Pages876-890
Number of pages15
DOIs
Publication statusPublished - Dec 2007

Publication series

NameJournal of Macroeconomics
Volume29

Keywords

  • Credibility
  • Currency crisis
  • Exchange rate
  • Inflation

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