Vulnerability of currency pegs
Subtitle: evidence from Brazil
By: Bernardo Guimaraes.
Contributors: London School of Economics and Political Science. Centre for Economic Performance.
Series: CEP discussion paper -- no. 871
Publisher: Centre for Economic Performance, London School of Economics and Political Science
Published: 2008
Place of publication: London
Language: eng
Format: Electronic resource
Description: 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 behaviour of the probability and the expected magnitude of a currency devaluation. The paper identifies the probability and expected magnitude of a devaluation of Brazilian Real in the period leading up to the end of the Brazilian pegged exchange rate regime, using data on exchange rate options. The empirical results are consistent with model predictions.
Notes: Title from PDF file (viewed on Oct. 10, 2008).

"June 2008."

Includes bibliographical references.

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