Greed, impatience and exchange rate determination

Frank Bohn

No 200605, Working Papers from School of Economics, University College Dublin

Abstract: This paper offers a theoretical explanation for the determination of exchange rates under specific conditions which can/could be found in some OECD and newly industrialised countries. In an Obstfeld (1994) framework extended to incorporate government expropriation reneging on a fixed exchange rate promise unambiguously produces short term benefits, but long term losses. The choice of exchange rate regime depends on the combined effect of greediness (expropriation) and impatience (political instability), though not straightforwardly. In particular, similarly stable countries may choose different exchange rate regimes due to different levels of rent-seeking, for instance Mexico and Chile in the 1980s.

Keywords: Exchange rate regime; Monetary policy; Fiscal policy; Expropriation; Political instability; Political economy; Foreign exchange rates; Monetary policy; Fiscal policy (search for similar items in EconPapers)
JEL-codes: E42 F41 H29 (search for similar items in EconPapers)
Date: 2006-05
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Persistent link: https://EconPapers.repec.org/RePEc:ucn:wpaper:200605

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