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Partial Delegation in a Model of Currency Crisis

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  • Virginie Boinet

Abstract

This paper shows that, in a fixed exchange‐rate system with an escape clause, delegating the decision on the magnitude of realignment to an inflation‐averse central banker reduces the range of realignment costs for which the policy‐maker necessarily devalues. Stressing the influence of devaluation expectations on currency crises, it is also shown that this strategy of delegation reduces the width of the multiple equilibria zone within which self‐fulfilling crises occur, thus promoting further the exchange‐rate system's stability. The higher the central banker's degree of inflation aversion, the greater is this reduction.

Suggested Citation

  • Virginie Boinet, 2003. "Partial Delegation in a Model of Currency Crisis," Bulletin of Economic Research, Wiley Blackwell, vol. 55(4), pages 347-355, October.
    • Handle: RePEc:bla:buecrs:v:55:y:2003:i:4:p:347-355
    DOI: 10.1111/1467-8586.00180
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    1. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    2. Svensson, Lars E O, 1997. "Optimal Inflation Targets, "Conservative" Central Banks, and Linear Inflation Contracts," American Economic Review, American Economic Association, vol. 87(1), pages 98-114, March.
    3. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
    4. Loisel, Olivier & Martin, Philippe, 2001. "Coordination, cooperation, contagion and currency crises," Journal of International Economics, Elsevier, vol. 53(2), pages 399-419, April.
    5. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-325, August.
    6. Maurice Obstfeld, 1994. "The Logic of Currency Crises," NBER Working Papers 4640, National Bureau of Economic Research, Inc.
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