NON-UNIQUENESS IN THE FIRST GENERATION BALANCE OF PAYMENTS CRISIS MODELS

Partha Sen
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Partha Sen: Delhi School of Economics

No 59, Working papers from Centre for Development Economics, Delhi School of Economics

Abstract: Krugman (1979), building on Salant and Henderson(1978), showed that for a small open economy following policies inconsistent with the fixed exchange rate regime it is on, there is a precise moment when the fixed exchange rate regime would be abandoned. I show that Krugman's original model is riddled with multiple equilibria. The Central Bank may be in possession of a lot of foreign exchange reserves but not an "adequate amount" i.e., not enough to maintain a fixed exchange rate.

Pages: 20 pages
Date: 1998-11
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Related works:
Working Paper: Non-Uniqueness in the First Generation Balance of Payments Crisis Model (2000)
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