The syndrome of exchange-rate-based stabilizations and the uncertain duration of currency pegs

Enrique Mendoza and Martín Uribe ()

No 548, International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.)

Abstract: This paper conducts a quantitative examination of the hypothesis that uncertain duration of currency pegs causes the sharp real appreciations and business cycles that affect chronically countries using fixed exchange rates as an instrument to stop high inflation. Numerical solutions of equilibrium dynamics of a two-sector small open economy with incomplete markets show that uncertain duration rationalizes the syndrome of exchange-rate-based stabilizations without price or wage rigidities. Three elements of the model are critical for these results: (a) a strictly-convex hazard rate function describing time-dependent devaluation probabilities, (b) the wealth effects introduced by incomplete insurance arkets, and (c) the supply-side effects introduced via capital accumulation and elastic labor supply. Uncertain duration also entails large welfare costs, compared to the perfect-foresight credibility framework, although temporary disinflations are welfare-improving. The model's potential empirical relevance is examined further by reviewing Mexico's post-war experience with the collapse of six currency pegs.

Keywords: Foreign exchange rates; Mexico (search for similar items in EconPapers)
Date: 1996
References: Add references at CitEc
Citations: View citations in EconPapers (19)

Downloads: (external link)
http://www.federalreserve.gov/pubs/ifdp/1996/548/default.htm (text/html)
http://www.federalreserve.gov/pubs/ifdp/1996/548/ifdp548.pdf (application/pdf)

Related works:
Working Paper: The Syndrome of Exchange-Rate-Based Stabilizations and the Uncertain Duration of Currency Pegs (1997)
Working Paper: The syndrome of exchange-rate-based stabilizations and the uncertain duration of currency pegs (1997)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgif:548

Access Statistics for this paper

More papers in International Finance Discussion Papers from Board of Governors of the Federal Reserve System (U.S.) Contact information at EDIRC.
Bibliographic data for series maintained by Ryan Wolfslayer ; Keisha Fournillier ().