Public debt and currency crisis: how central bank opacity can make things bad?

Dai, Meixing (2008): Public debt and currency crisis: how central bank opacity can make things bad? Published in: Economics Bulletin , Vol. 29, No. 1 (February 2009): pp. 190-198.

Abstract

This paper examines how the transparency in monetary policy decision can impact the likelihood of currency crisis in a simple open economy model with public debt. In the presence of opacity, it is found that if the debt is high, the government will devaluate and vice versa, and the self-fulfilling multiple equilibria solution disappears. Furthermore, the opacity reduces the threshold of public debt above which the government is considered as totally lacking the credibility in its pre-commitment to maintain fixed the exchange rate.

• Item Type: MPRA Paper
• Language: English
• Keywords: central bank transparency, public debt, currency crisis, speculative attack
• Subjects: F - International Economics > F3 - International Finance > F37 - International Finance Forecasting and Simulation; O - Economic Development, Technological Change, and Growth > O2 - Development Planning and Policy > O23 - Fiscal and Monetary Policy in Development; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies; E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E52 - Monetary Policy (Targets, Instruments, and Effects); F - International Economics > F3 - International Finance > F31 - Foreign Exchange

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