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Self‐fulfilling Currency Crises and Central Bank Independence

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  • Bernard Bensaid
  • Olivier Jeanne

Abstract

We develop a model of a fixed exchange rate peg arrangement derived from the Barro–Gordon model of rules versus discretion. It is shown that the fixed peg is vulnerable to self‐fulfilling currency crises in which the unemployment rate increases, the credibility of the rule decreases, but, paradoxically, the reputation of the policy‐maker improves. Delegating monetary policy to an independent central banker does not prevent this type of crisis from arising, and can even make it more costly. JEL Classification: F3; F4

Suggested Citation

  • Bernard Bensaid & Olivier Jeanne, 2000. "Self‐fulfilling Currency Crises and Central Bank Independence," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(4), pages 605-620, December.
    • Handle: RePEc:bla:scandj:v:102:y:2000:i:4:p:605-620
    DOI: 10.1111/1467-9442.00217
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    JEL classification:

    • F3 - International Economics - - International Finance
    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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