Devaluation of fixed exchange rates: optimal strategy in the presence of speculation

Ivan Pastine

Economic Theory, 2000, vol. 15, issue 3, 661 pages

Abstract: This paper analyzes devaluations in a fixed exchange rate system by endogenizing both the speculation and devaluation decisions. It is shown that deterministic devaluation rules are generally sub-optimal for the central bank. In order to deter speculation the central bank introduces uncertainty into the timing of devaluation. The nature this mixed strategy is derived, as is the optimal strategy for speculators. The analysis allows an explanation of successful devaluations that are not precipitated by a speculative attacks, even under perfect capital mobility.

Keywords: Speculative attack; Optimising balance-of-payments crises. (search for similar items in EconPapers)
JEL-codes: E58 F31 (search for similar items in EconPapers)
Date: 2000-04-13
Note: Received: May 17, 1999; revised version: June 2, 1999
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Citations: View citations in EconPapers (3)

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