Stabilisations, Crises and the "Exit" Problem - A Theoretical Model

Michael Bleaney and Marco Gundermann ()
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Michael Bleaney: University of Nottingham

Macroeconomics from EconWPA

Abstract: Exchange-rate-based stabilisations, even if successful, usually lack credibility initially. This is reflected in high (ex post) real interest rates and some degree of real exchange rate appreciation. Empirical observation suggests that wage inflation declines smoothly over time whilst interest rates are volatile. We capture this by assuming that expectations are formed adaptively in labour markets, but rationally in financial markets. The model provides insights into: the eruption of exchange rate crises after a long period of apparently successful stabilisation; the potential advantages of a heterodox approach; when to delay a stabilisation attempt; and the optimal date for ''exit'' to a floating exchange rate.

Keywords: credibility; currency crisis; exchange rate; stabilisation; inflation reduction; adaptive expectations; rational expectations; real overvaluation effects (search for similar items in EconPapers)
JEL-codes: E31 F41 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-ifn, nep-lam and nep-mac
Date: Written 2002-07-05
Note: Type of Document - pdf; prepared on PC; to print on probably A4; pages: 31. based on earlier discussion paper
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http://129.3.20.41/eps/mac/papers/0207/0207003.pdf (application/pdf)

Related works:
Journal Article: Stabilizations, crises and the "exit" problem - A theoretical model (2007)
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