Policy Implications of "Second-Generation" Crisis Models

Author/Editor:

Nancy P. Marion ; Robert P Flood

Publication Date:

February 1, 1997

Electronic Access:

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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.

Series:

Working Paper No. 1997/016

Subject:

Conventional peg Currencies Exchange rate adjustments Exchange rate devaluation Exchange rates Foreign exchange Money

English

Publication Date:

February 1, 1997

ISBN/ISSN:

9781451843361/1018-5941

Stock No:

WPIEA0161997

Pages:

11

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