Policy Implications of "Second-Generation" Crisis Models

February 1, 1997

Preview Citation

Format: Chicago

Nancy P. Marion, and Robert P Flood. Policy Implications of "Second-Generation" Crisis Models, (USA: International Monetary Fund, 1997) accessed November 21, 2024

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary

After the speculative attacks on government-controlled exchange rates in Europe and in Mexico, economists began to develop models of currency crises with multiple solutions. In these models, a currency crisis occurs when the economy suddenly jumps from one solution to another. This paper examines one of the new models, finding that raising the cost of devaluation may make a crisis more likely. Consequently, slow convergence to a monetary union, which increases the cost to the government of reneging on an exchange rate peg, may be counterproductive. This conclusion is exactly the opposite of that obtained from earlier models.

Subject: Conventional peg, Currencies, Exchange rate adjustments, Exchange rate devaluation, Exchange rates, Foreign exchange, Money

Keywords: Conventional peg, Cost of devaluation, Currencies, Devaluation, Devaluation model, Devaluation of the currency, Europe, Exchange rate, Exchange rate adjustments, Exchange rate devaluation, Exchange rates, Price level, Second-generation model, WP

Publication Details

Pages:

11
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 1997/016
Stock No:

WPIEA0161997
ISBN:

9781451843361
ISSN:

1018-5941

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