When Are Fixed Exchange Rates Really Fixed?

Andres Velasco

No 5842, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper analyzes the sustainability of fixed exchange rates by extending the Barro-Gordon framework to a fully dynamic context in which the level of a state variable (in this case debt) determines the payoffs available to the government at each point in time. The model yields the following results. If debt is sufficiently low, there is an equilibrium in which the government does not devalue. For an intermediate range of debt levels, the government devalues in response to an attack but not otherwise, so that self-fulfilling attacks can occur. Finally, for yet another debt range there can also be sunspot equilibria in which an attack (and the corresponding devaluation) occurs with positive probability.

JEL-codes: E52 F31 (search for similar items in EconPapers)
Date: 1996-11
Note: IFM
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (3)

Published as Journal of Development Economics, Vol. 54, no. 1 (October 1997): 5-25.

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