Document Type
Article
Publication Date
5-2003
Source Publication
Journal of Economics and Business
Abstract
This paper applies a two-country framework that allows for currency substitution in an environment in which policymakers optimally vary interest rates in light of utility-based objectives, one country pegs the value of its currency to the other nation’s currency, and government revenue is generated via explicit taxes and seigniorage. The analysis illustrates the roles that currency substitution, currency preferences, and efficiency of tax systems play in contributing to the likelihood of a “run” on one nation’s currency. We explore how these factors interact to influence the probability of a currency crisis in the country that fixes its exchange rate.
Comments
Originally published in Journal of Economics and Business, Volume 55, No. 3 (May/June 2003).
The article was originally published by Elsevier. For more information about accessing the definitive published version of this article, consult the publisher’s website here.