A Currency Crisis Model with an Optimising Policymaker

Gulcin Ozkan, Alan Sutherland

    Research output: Contribution to journalArticlepeer-review

    38 Citations (Scopus)

    Abstract

    A model is presented in which the abandonment of a fixed exchange rate regime is triggered by an optimising policymaker who wants to loosen monetary policy and boost aggregate demand. Agents in the foreign exchange market know the policymaker's objective function and build expectations of a regime switch into interest differentials. The resulting rise in interest rates affects the policymaker's decision to switch regime. It is shown that a rational expectations equilibrium exists where the fixed rate is abandoned in response to adverse demand shocks. In some circumstances multiple equilibria arise which may lead to self-fulfilling crises. (C) 1998 Elsevier Science B.V.

    Original languageEnglish
    Pages (from-to)339-364
    Number of pages26
    JournalJournal of International Economics
    Volume44
    Publication statusPublished - Apr 1998

    Keywords

    • speculative attacks
    • balance of payments crises
    • OF-PAYMENTS CRISES
    • REALIGNMENT EXPECTATIONS
    • EXCHANGE
    • BALANCE
    • POLICIES
    • GOLD

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