Paper #840

Títol:

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

Autor:

Fernando Broner

Data:

Desembre 1999 (Revisió: Febrer 2002)

Resum:

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 eective 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.

Paraules clau:

Currency crises; timing; disaggregated information; interest rate defenses.

Codis JEL:

D8, E43, E58, F31

Àrea de Recerca:

Macroeconomia i Economia Internacional

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