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Currency Boards and Currency Crises

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  • Gregor Irwin

Abstract

This paper demonstrates how a currency board can become vulnerable to a crises in which the policymaker is forced to devalue. The model is built from two blocks: first, incomplete information about the devaluation cost faced by the policymaker; and second, unemployment persistence. Incomplete information can result in multiple equilibria. In one class of equilibrium the policymaker has a credibility problem and maintaining the currency board is costly in terms of unemployment. If unemployment is persistent then pressure to devalue can build up over time until it becomes unbearable and the policymaker is forced to devalue.

Suggested Citation

  • Gregor Irwin, 2001. "Currency Boards and Currency Crises," Economics Series Working Papers 65, University of Oxford, Department of Economics.
    • Handle: RePEc:oxf:wpaper:65
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    References listed on IDEAS

    as
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    8. 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.
    9. Luis A. Rivera-Batiz & Amadou N. R. Sy, 2013. "Currency Boards, Credibility, and Macroeconomic Behavior," Annals of Economics and Finance, Society for AEF, vol. 14(2), pages 831-870, November.
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    Cited by:

    1. Mulino, Marcella, 2002. "Currency boards, credibility and crises," Economic Systems, Elsevier, vol. 26(4), pages 381-386, December.

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    More about this item

    Keywords

    currency boards; crises;

    JEL classification:

    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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