Seigniorage revenue, deficits and self-fulfilling currency crises

This paper examines potential resolutions to the conflict between a fixed exchange rate and seigniorage revenue requirement of a stylized developing economy that gives rise to a currency crisis. The government has an informational advantage and can decide when it is optimal to invoke an 'escape clause', i.e. to drop the peg and float. Speculators must guess when the crisis will happen, based on their assessment of the probability of collapse, and this makes pegged exchange rate equilibria unstable.