When pegging is a commitment device: Revisiting conventional wisdom about currency crises

Nikola Tarashev () and Anna Zabai

Journal of International Economics, 2019, vol. 118, issue C, 233-247

Abstract: Could a less conservative central bank, that is, one with a smaller aversion to inflation, be more likely to withstand pressure on its currency peg? Traditional currency-crisis models provide an unambiguous answer: No. We argue that this answer stems from the models' narrow focus on how a central bank's resistance to private-sector pressure affects output and inflation in the short run. The answer may reverse if pegging is a commitment device, serving to address domestic credibility issues in the long run by transferring the conduct of monetary policy abroad. As a less conservative central bank stands to benefit more from such a transfer, it should find a peg more valuable.

Keywords: Currency crises; Inflation bias; Intertemporal trade-offs; Global games (search for similar items in EconPapers)
JEL-codes: D84 F31 (search for similar items in EconPapers)
Date: 2019
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Persistent link: https://EconPapers.repec.org/RePEc:eee:inecon:v:118:y:2019:i:c:p:233-247

DOI: 10.1016/j.jinteco.2019.02.001

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