Financial Market Development and Self-Fulfilling Currency Crises.

We build a model of a fixed exchange rate regime with escape clauses and output persistence. In the spirit of the Asian crisis in 1997, persistence in our model arises from inability of the domestic financial institutions to intermediate international credit. Our main message is that since persistence generates long run distortions that are sensitive to the prevailing policy preferences, the choice of an optimal exchange rate regime and the preference for a policy target should reflect the degree of development of the domestic financial institutions.