Partial Delegation in a Model of Currency Crisis

Virginie Boinet

Bulletin of Economic Research, 2003, vol. 55, issue 4, 347-355

Abstract: This paper shows that, in a fixed exchange‐rate system with an escape clause, delegating the decision on the magnitude of realignment to an inflation‐averse central banker reduces the range of realignment costs for which the policy‐maker necessarily devalues. Stressing the influence of devaluation expectations on currency crises, it is also shown that this strategy of delegation reduces the width of the multiple equilibria zone within which self‐fulfilling crises occur, thus promoting further the exchange‐rate system's stability. The higher the central banker's degree of inflation aversion, the greater is this reduction.

Date: 2003
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https://doi.org/10.1111/1467-8586.00180

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