Self‐fulfilling Currency Crises and Central Bank Independence

Bernard Bensaid and Olivier Jeanne

Scandinavian Journal of Economics, 2000, vol. 102, issue 4, 605-620

Abstract: We develop a model of a fixed exchange rate peg arrangement derived from the Barro–Gordon model of rules versus discretion. It is shown that the fixed peg is vulnerable to self‐fulfilling currency crises in which the unemployment rate increases, the credibility of the rule decreases, but, paradoxically, the reputation of the policy‐maker improves. Delegating monetary policy to an independent central banker does not prevent this type of crisis from arising, and can even make it more costly. JEL Classification: F3; F4

Date: 2000
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