In this paper the Maximum Principle is used to derive optimal policies for linear-quadratic, continuous-time economic systems where there may be more than one policy-maker and where the private sector may have rational expectations. The analogy between solving full-information differential games...

The extent which exchange rate management can coexist with an independent monetary policy is examined in the context of a model with exchange rate bands. Using a Dornbusch model in which stochastic shocks are added to the Phillips curve, we analyze the implications of assuming that the monetary...

In the first decade of its existence the EMS passed through three phases of realignments: full accommodation, partial accommodation and zero accommodation of inflation differentials. To what extent, however, does the new freedom of capital movements within the EC rule out such gradual...

We study a model of sovereign debt crisis that combines problems of creditor co-ordination and debtor moral hazard. Solving the sovereign debtor’s incentives leads to excessive ‘rollover failure’ by creditors when sovereign default occurs. We discuss how the incidence of crises might be...

Germany is generally regarded as the nominal anchor for Europe. Its participation is the sine qua non of EMU. It has been the largest net contributor to EU finances, the leading proponent of greater economic and political union, and the leading example of the virtues of fiscal and monetary...

Using a variant of the Cagan model with rational expectations, this paper shows that expected stabilization can result in a budget deficit in excess of the maximum inflation tax. A cap on the deficit dampens inflation expectations and raises real balances, thus increasing the yield of the...

Credit market imperfections have been blamed for the depth and persistence of the Great Depression in the US. Could similar mechanisms have played a role in ending the East Asian miracle? After a brief account of the nature of the recent crises, we use Kiyotaki and Moore’s (1997) model of...

The desire to avoid speculative runs on currencies appears to be one of the main reasons leading policy-makers to impose currency bands, but the standard analysis of target zones rules out any speculative inefficiencies by assumption. As an alternative we first present simple models of excess...

An iconic model with high leverage and overvalued collateral assets is used to illustrate the amplification mechanism driving asset prices to ‘overshoot’ equilibrium when an asset bubble bursts - threatening widespread insolvency and what Richard Koo calls a ‘balance sheet recession’....

This is an exercise in the positive economics of alternative monetary regimes. The behaviour of output and prices is compared using a stochastic specification which allows asymptotic variances to be obtained without difficulty. Free floating of exchange rates together with national money supply...