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Pierre-Richard Agénor
This paper examines the behavior of real interest rates in exchange-rate based stabilization programs. The analysis is based on a model with imperfect capital mobility and optimizing agents. A permanent reduction in the devaluation rate is first shown to have an ambiguous effect on real interest rates on impact. The analysis is then extended to consider a stabilization program characterized by an initial reduction in the rate of devaluation of the nominal exchange rate, and the announcement of a future increase in income taxes. The impact effect on real interest rates is shown to depend upon the degree of credibility of the announcement. Real interest rates may fall if agents do not believe that taxes will be raised, and rise if the future tax reform is sufficiently credible.
Mr. Rodrigo O. Valdes and Mr. Ilan Goldfajn

than (i) 1.96 times the standard deviation of the country’s nominal exchange rate devaluation rate, and (ii) 2 percent plus 1.5 times the devaluation rate of the previous month. We require the crises to be 2 months apart. 5 In the sample of 26 countries, this index produces 61 crisis episodes (and 2,890 episodes with no crisis). Second, we define an alternative crisis indicator based upon the evolution of the real exchange rate. Given downward price rigidity we associate large jumps in the RER as a crisis (larger than 2 standard deviations from the mean). This

Mr. Rodrigo O. Valdes and Mr. Ilan Goldfajn
This paper studies whether exchange rate expectations and overvaluations are predictors of currency crises. The results suggest that overvaluation has predictive power in explaining crises. However, although expected depreciation obtained from survey data partially takes different measures of exchange rate misalignment into consideration, expectations fail to anticipate currency crises.