Collapse of a Crawling Peg Regime in the Presence of a Government Budget Constraint

28 Pages Posted: 15 Feb 2006

See all articles by Miguel A. Savastano

Miguel A. Savastano

Monetary and Capital Markets Departrment

Date Written: April 1991

Abstract

This study extends the research on balance-of-payments crises by investigating the dynamics of the collapse of a crawling exchange rate in the presence of an explicit link between the fiscal deficit and domestic credit. It shows that such an exchange rate regime is characterized by two potential steady-state equilibria. This introduces an ex-ante indeterminacy regarding the timing and magnitude of the speculative attack on international reserves in the event of a sustained inconsistency between the country`s fiscal and exchange rate policies. The paper discusses the conditions that would define the actual timing of the regime`s breakdown.

JEL Classification: F31

Suggested Citation

Savastano, Miguel A., Collapse of a Crawling Peg Regime in the Presence of a Government Budget Constraint (April 1991). IMF Working Paper No. 91/42, Available at SSRN: https://ssrn.com/abstract=884773

Miguel A. Savastano (Contact Author)

Monetary and Capital Markets Departrment ( email )

700 19th Street NW
Washington, DC 20431
United States

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