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Partial Delegation in a Model of Currency Crisis
Author(s) -
Boinet Virginie
Publication year - 2003
Publication title -
bulletin of economic research
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.227
H-Index - 29
eISSN - 1467-8586
pISSN - 0307-3378
DOI - 10.1111/1467-8586.00180
Subject(s) - delegation , economics , devaluation , inflation (cosmology) , currency crisis , currency , exchange rate , monetary economics , physics , management , theoretical physics
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.