Endogenous Exchange Rate Regime Switches

46 Pages Posted: 27 Feb 2001 Last revised: 2 Apr 2010

See all articles by Gabriel de Kock

Gabriel de Kock

Citigroup

Vittorio Grilli

Independent; National Bureau of Economic Research (NBER)

Date Written: August 1989

Abstract

In this paper we demonstrate that exchange rate regime switching is compatible with optimal government policies. Nominal exchange-rate regimes are formalized as equilibrium commitments on future seigniorage policies, and the collapse of an exchange-rate peg as an excusable default which allows the government to lump-sum tax private sector money holdings. We demonstrate that a regime in which the exchange-rate peg is allowed to collapse when government spending is unusually high is a trigger-strategy equilibrium. Such a regime can be superior to both fixed and flexible exchange rate because it combines some of the flexibility of the floating exchange rates with some of the benefits of precommitment afforded by fixed rates.

Suggested Citation

de Kock, Gabriel and Grilli, Vittorio, Endogenous Exchange Rate Regime Switches (August 1989). NBER Working Paper No. w3066. Available at SSRN: https://ssrn.com/abstract=253129

Gabriel De Kock (Contact Author)

Citigroup ( email )

399 Park Avenue
New York, NY 10043
United States

Vittorio Grilli

Independent

Ministero del Tesoro
Direzione Generale del Tesoro Capo del Servizio I via XX Settembre 97
Roma 00187

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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