Seigniorage revenue, deficits and self-fulfilling currency crises

This paper examines potential resolution to the conflict between a fixed ex change rate and seigniorage revenue requirement of a stylized developing ec onomy that gives rise to a currency crisis. The government has an informati onal advantage and can decide when it is optimal to invoke an 'escape claus e', 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. (C) 2001 Elsevier Scie nce B.V. All rights reserved.