When pegging ties your hands

Nikola Tarashev () and Anna Zabai

No 547, BIS Working Papers from Bank for International Settlements

Abstract: Could a less conservative central bank - one that faces a more severe time inconsistency problem - be less likely to succumb to an attack on a currency peg? Traditional currency-crisis models provide a firm answer: No. We argue that the answer stems from these models' narrow focus on how a central bank's response to a speculative attack affects output and inflation in the short run. The answer may reverse if we recognize that a credible currency peg solves time consistency issues in the long run. As a less conservative central bank stands to benefit more from tying its own hands, it should find a peg more valuable.

Keywords: currency crises; strategic uncertainty; global games; time inconsistency (search for similar items in EconPapers)
Pages: 56 pages
Date: 2016-03
New Economics Papers: this item is included in nep-cba and nep-mon
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Citations: View citations in EconPapers (2)

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