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A Dynamic Model of Export Competition, Policy Coordination, and Simultaneous Currency Collapse
Author(s) -
Kasa Kenneth,
Huh Chan
Publication year - 2001
Publication title -
review of international economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.513
H-Index - 58
eISSN - 1467-9396
pISSN - 0965-7576
DOI - 10.1111/1467-9396.00264
Subject(s) - devaluation , economics , currency , boom , monetary economics , shock (circulatory) , foreign exchange market , incentive , competition (biology) , international economics , exchange rate , microeconomics , medicine , ecology , environmental engineering , biology , engineering
This paper shows that the “price wars during booms” logic of Rotemberg and Saloner ( American Economic Review , vol. 76, 1986, 390–407) provides an explanation of contagious currency crises. The idea is as follows. When a group of countries relies on exports to a common foreign market, pressures for competitive devaluations arise. In response, competing exporters peg their exchange rates to the currency of their export market. However, it must be in each country’s self‐interest to adhere to its peg, and a common adverse external shock can make an existing (implicitly) cooperative arrangement unenforceable. Maintaining the arrangement requires a collective devaluation that reduces the unilateral incentive to devalue.