On the Timing of Balance of Payments Crises: Disaggregated Information and Interest Rate Policy

47 Pages Posted: 17 Sep 2004

See all articles by Fernando Broner

Fernando Broner

CREI; Barcelona GSE; Universitat Pompeu Fabra; CEPR

Date Written: February 2002

Abstract

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 e ective 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.

Keywords: Currency crises, timing, disaggregated information, interest rate defenses

JEL Classification: D8, E43, E58, F31

Suggested Citation

Broner, Fernando, On the Timing of Balance of Payments Crises: Disaggregated Information and Interest Rate Policy (February 2002). Available at SSRN: https://ssrn.com/abstract=591082 or http://dx.doi.org/10.2139/ssrn.591082

Fernando Broner (Contact Author)

CREI ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

Barcelona GSE

Ramon Trias Fargas 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

Universitat Pompeu Fabra ( email )

Ramon Trias Fargas, 25-27
Barcelona, 08005
Spain
+34 93 542 2601 (Phone)

HOME PAGE: http://www.crei.cat/people/broner

CEPR ( email )

London
United Kingdom
+34 93 542 2601 (Phone)

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