| Author: | Ozkan, F. G. Sutherland, A. |
| Title: | A currency crisis model with an optimising policymaker |
| Journal: | Journal of International Economics
1998 : APR, VOL. 44:2, p. 339-364 |
| Index terms: | EXCHANGE RATES MONETARY POLICY SPECULATION BALANCE OF PAYMENTS CRISES |
| Language: | eng |
| Abstract: | In the paper, a model is presented in which the abandonment of a fixed exchange rate regime is triggered by an optimising policymaker who wants to loosen monetary policy and boost aggregate demand. Agents in the foreign exchange market know the policymaker's objective function and build expectations of a regime switch into interest differentials. The resulting rise in interest rates affects the policymaker's decision to switch regime. It is shown that a rational expectations equilibrium exists where the fixed rate is abandoned in response to adverse demand shocks. In some circumstances multiple equilibria arise which may lead to self-fulfilling crises. |
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