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dc.contributor.authorTambakis, Demosthenes N
dc.date.accessioned2010-05-28T13:45:43Z
dc.date.available2010-05-28T13:45:43Z
dc.date.issued2002
dc.identifier.citationJEL classiffcation: E52, E58, F33, F3en
dc.identifier.urihttp://www.dspace.cam.ac.uk/handle/1810/225213
dc.description.abstractDo expected future exchange rate fluctuations affect current social welfare? In the third-generation approach to currency crises, financial fragility can trigger devaluation and default. Expected future depreciation is costly if it raises ex ante real interest rates. Given the strong violation of uncovered interest parity, expected future outcomes' current cost/benefit depends on the currency risk premium. I extend the static one-period Barro-Gordon welfare loss function to include expected future depreciation and show that, when foreign investors are risk-averse, depreciation bias is higher than the static case if aggregate demand is a function of ex ante real rates. If demand depends on the ex post real interest rate, average depreciation can be zero if current welfare is sufficiently sensitive to the state of the financial sector. In this stylised framework, depreciation bias can be mitigated even in the presence of time-inconsistency, and expected welfare may be higher.en
dc.language.isoenen
dc.publisherCFAP, Cambridge Judge Business School, University of Cambridgeen
dc.relation.ispartofseriesCFAP Working Paperen
dc.relation.ispartofseries03en
dc.rightsAll Rights Reserveden
dc.rights.urihttps://www.rioxx.net/licenses/all-rights-reserved/en
dc.subjectDepreciation biasen
dc.subjectreal interest rateen
dc.subjectcurrency risk premiumen
dc.subjectsocial welfareen
dc.titleDepreciation bias, financial-sector fragility and currency risken
dc.typeWorking Paperen
dc.type.versionpublished versionen


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