Obstfeld (1994) shows that a currency crisis can be explained by the occurrence of multiple equi-
libria (2 interior equilibria). For the same level of economic fundamentals, it may be optimal for
the government either to devalue or to maintain the peg. The decision depends on the inßationary
expectations of economic agents: it is the phenomenon of self-fulÞlling crisis. In order to avoid this
kind of crisis, this article offers a new proposal: a partial delegation of exchange rate policy to a more
inßation-averse central banker. It shows that if the government continues to decide whether to main-
tain the peg while the central banker chooses the magnitude of any realignment, lower inßationary
expectations will lead to the existence of only one equilibrium. The probability of crisis will then be
considerably reduced and a currency crisis will occur only if negative shocks substantially damage the
level of economic fundamentals
