Optimal Exchange Rate Policy and Business Cycles

Alexandre Cunha
Authors registered in the RePEc Author Service: Alexandre Barros da Cunha and Alexandre Mendes Cunha

Brazilian Review of Econometrics, 2013, vol. 33, issue 1

Abstract: Implementation and collapse of exchange rate pegging schemes are recurrent events. A currency crisis (pegging) is often followed by an economic downturn (boom). In this essay I study why a benevolent Central Bank should pursue a monetary policy that leads to those recurrent currency crises and subsequent periods of pegging. I show that the optimal policy induces a competitive equilibrium that displays a boom in periods of below average devaluation and a recession in periods of above average devaluation. Therefore, a currency crisis (pegging) can be understood as an optimal policy answer to a recession (boom).

Date: 2013
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Working Paper: Optimal Exchange Rate Policy and Business Cycles (2002)
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Persistent link: https://EconPapers.repec.org/RePEc:sbe:breart:v:33:y:2013:i:1:a:14877

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