The Dynamics of Currency Crises - Results from Intertemporal Optimization and Viscosity Solutions

Christian Bauer and Philip Ernstberger

VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association

Abstract: We apply an in nite horizon intertemporal optimization model to a simple speculative attack framework. Thereby, the central bank faces a one control two-state variables optimization problem with endogenuous exit. By setting the interest rate the central bank can stimulate the economy or fend o speculators. We show that two focal points emerge. Depending on the time preference and the state, cycles can improve utility. A regime change is associated with costs and can be forced by the state of the economy or induced by choice. In the latter case the costs for defending outweigh the costs of an immediate opt-out. During the existence of the regime the highest growth is reached through convergence to a no stress steady state, but is only optimal for a central bank with low time preference. Therefore, we propose to take measures assuring a lower time preference like independence, long-term mandates, and long-term policy goals.

JEL-codes: C61 E58 F30 (search for similar items in EconPapers)
Date: 2014
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://www.econstor.eu/bitstream/10419/100300/1/VfS_2014_pid_600.pdf (application/pdf)

Related works:
Working Paper: The Dynamics of Currency Crises---Results from Intertemporal Optimization and Viscosity Solutions (2014)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:zbw:vfsc14:100300

Access Statistics for this paper

More papers in VfS Annual Conference 2014 (Hamburg): Evidence-based Economic Policy from Verein für Socialpolitik / German Economic Association Contact information at EDIRC.
Bibliographic data for series maintained by ZBW - Leibniz Information Centre for Economics ().