Self-fulfilling currency crises and central bank independence

We develop a model of a fixed exchange rate peg arrangement derived from th e Barro-Gordon model of rules versus discretion. It is shown that the fixed peg is vulnerable to self-fulfilling currency crises in which the unemploy ment rate increases, the credibility of the rule decreases, but, paradoxica lly, the reputation of the policy-maker improves. Delegating monetary polic y to an independent central banker does not prevent this type of crisis fro m arising, and can even make it more costly.