The Politics of Surprise Devaluations: Modelling Motives for Giving Up a Peg

Frank Bohn

Journal of Economics and Statistics (Jahrbuecher fuer Nationaloekonomie und Statistik), 2013, vol. 233, issue 5-6, 562-574

Abstract: Planned ‘‘surprise’’ devaluations are often spurred by non-economic circumstances: a rentseeking government; political instability; or the opportunity to put the blame on a predecessor government. In this paper, these aspects are incorporated in the monetary and fiscal policy framework first suggested by Alesina and Tabellini (1987). It is shown that reneging on a fixed exchange rate promise unambiguously produces short term benefits, but long run losses. This leads to a non-straightforward trade-off between greediness (propensity for expropriation) and political stability (which implies a low time preference). The findings are empirically relevant and theoretically robust to extensions.

Keywords: Grand corruption; political instability; exchange rate regime; monetary policy; fiscal policy; rent-seeking; Grand corruption; political instability; exchange rate regime; monetary policy; fiscal policy; rent-seeking (search for similar items in EconPapers)
Date: 2013
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Persistent link: https://EconPapers.repec.org/RePEc:jns:jbstat:v:233:y:2013:i:5-6:p:562-574

DOI: 10.1515/jbnst-2013-5-602

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