On the timing of balance of payments crises: Disaggregated information and interest rate policy

Fernando Broner

Economics Working Papers from Department of Economics and Business, Universitat Pompeu Fabra

Abstract: This paper proposes a dynamic framework to study the timing of balance of payments crises. The model incorporates two main ingredients: (i) investors have private information; (ii)investors interact in a dynamic setting, weighing the high returns on domestic assets against the incentives to pull out before the devaluation. The model shows that the presence of disaggregated information delays the onset of BOP crises, giving rise to discrete devaluations. It also shows that high interest rates can be e ective in delaying and possibly avoiding the abandonment of the peg. The optimal policy is to raise interest rates sharply as fundamentals become very weak. However, this policy is time inconsistent, suggesting a role for commitment devices such as currency boards or IMF pressure.

Keywords: Currency crises; timing; disaggregated information; interest rate defenses. (search for similar items in EconPapers)
JEL-codes: D8 E43 E58 F31 (search for similar items in EconPapers)
Date: 1999-12, Revised 2002-02
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (7)

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Persistent link: https://EconPapers.repec.org/RePEc:upf:upfgen:840

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