Transaction Costs, Multiple Equilibria, and Currency Devaluation
نویسنده
چکیده
This paper attempts to examine the effect of a currency devaluation on domestic output by incorporating the Coase (1937) assertion into a standard open economy model. Our results show that there will be multiple equilibria in the labor market, i.e. low or high employment equilibrium, because of transaction cost externalities. If the labor market is in the high-employment equilibrium, a currency devaluation will depress domestic output. Conversely, a currency devaluation will enhance domestic output when the labor market is in the low-employment equilibrium. This conclusion provides an explanation for the mixed effect of the currency devaluation on domestic output in the empirical studies. © 2014 AESS Publications. All Rights Reserved.
منابع مشابه
No 871 June 2008 Vulnerability of Currency Pegs : Evidence From Brazil
This paper analyses predictions of a simple model of currency crises in which the peg will be abandoned when the currency overvaluation hits a certain threshold, unknown to the agents. Due to learning about the threshold, some features usually observed in the data and identified with models with multiple equilibria arise in the model. But the model yields distinctive predictions about the behav...
متن کاملVulnerability of currency pegs: evidence from Brazil∗
This paper analyses predictions of a simple model of currency crises in which the peg will be abandoned when the currency overvaluation hits a certain threshold, unknown to the agents. Due to learning about the threshold, some features usually observed in the data and identified with models with multiple equilibria arise in the model. But the model yields distinctive predictions about the behav...
متن کاملPreempting Speculative Attacks Robust Predictions in a Global Game with Multiple Equilibria∗ George-Marios Angeletos MIT and NBER
How do economic fundamentals, policy preferences, and market information shape optimal policy and devaluation outcomes during speculative currency crises? We address these questions in a global-game model where speculators lack common knowledge regarding the policy maker’s commitment to defending the currency. While previous work has shown that the signaling role of preemptive policy measures s...
متن کاملSelf-Fulfilling Currency Crises: The Role of Interest Rates
We develop a model of currency crises, in which traders are heterogeneously informed, and interest rates are endogenously determined in a noisy rational expectations equilibrium. In our model, multiple equilibria result from distinct roles an interest rate plays in determining domestic asset market allocations and the devaluation outcome. Except for special cases, this finding is not affected b...
متن کاملRobust Predictions in Global Games with Multiple Equilibria: Defense Policies Against Currency Attacks∗ George-Marios Angeletos MIT and NBER
This paper studies defense policies in a global-game model of speculative currency attacks. Although the signaling role of policy interventions sustains multiple equilibria, a number of novel predictions emerge which are robust across all equilibria. (i) The central bank intervenes by raising domestic interest rates, or otherwise raising the cost of speculation, only when the value it assigns t...
متن کامل