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Title:Macroeconomic regime switches and speculative attacks PDF Logo
Authors:Maćkowiak, Bartosz
Issue Date:2006
Series/Report no.:SFB 649 discussion paper 2006,025
Abstract:This paper explains a currency crisis as an outcome of a switch in how monetary policy and fiscal policy are coordinated. The paper develops a model of an open economy in which monetary policy starts active, fiscal policy starts passive and, in a particular state of nature, monetary policy switches to passive and fiscal policy switches to active. The probability of the regime switch is endogenous and changes over time together with the state of the economy. The regime switch is preceded by a sharp increase in interest rates and causes a jump in the exchange rate. The model predicts that currency composition of public debt affects dynamics of macroeconomic variables. Furthermore, the model is consistent with evidence from recent currency crises, in particular small seigniorage revenues.
Subjects:Coordination of monetary policy and fiscal policy
policy regime switch
currency crisis
speculative attack
fiscal theory of the price level
JEL:E52
E61
F33
Document Type:Working Paper
Appears in Collections:SFB 649 Discussion Papers, HU Berlin

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