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The Dangers of Exchange-Rate Pegging in Emerging-Market Countries

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  • Mishkin, Frederic S

Abstract

This paper examines the question of whether pegging exchange rates is a good strategy for emerging-market countries. Although pegging the exchange rate provides a nominal anchor for emerging-market countries that can help them to control inflation, the analysis in this paper does not provide support for this strategy for the conduct of monetary policy. First there are the usual criticisms of exchange-rate pegging, that it entails the loss of an independent monetary policy, exposes the country to the transmission of shocks from the anchor country, increases the likelihood of speculative attacks and potentially weakens the accountability of policymakers to pursue anti-inflationary policies. However, most damaging to the case for exchange-rate pegging in emerging-market countries is that it can increase financial fragility and heighten the potential for financial crises. Because of the devastating effects on the economy that financial crises can bring, an exchange-rate peg is a very dangerous strategy for controlling inflation in emerging-market countries. Instead, this paper suggests that a strategy with a greater likelihood of success involves the granting of independence to the central bank and the adoption of inflation targeting. Copyright 1998 by Blackwell Publishers Ltd.

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Bibliographic Info

Article provided by Wiley Blackwell in its journal International Finance.

Volume (Year): 1 (1998)
Issue (Month): 1 (October)
Pages: 81-101

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Handle: RePEc:bla:intfin:v:1:y:1998:i:1:p:81-101

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References

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  1. Kydland, Finn E & Prescott, Edward C, 1977. "Rules Rather Than Discretion: The Inconsistency of Optimal Plans," Journal of Political Economy, University of Chicago Press, vol. 85(3), pages 473-91, June.
  2. Robert J. Barro & David B. Gordon, 1981. "A Positive Theory of Monetary Policy in a Natural-Rate Model," NBER Working Papers 0807, National Bureau of Economic Research, Inc.
  3. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  4. Bennett T. McCallum, 1996. "Crucial Issues Concerning Central Bank Independence," NBER Working Papers 5597, National Bureau of Economic Research, Inc.
  5. Maurice Obstfeld & Kenneth Rogoff, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall.
  6. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  7. Carmen M. Reinhart & Graciela L. Kaminsky, 1999. "The Twin Crises: The Causes of Banking and Balance-of-Payments Problems," American Economic Review, American Economic Association, vol. 89(3), pages 473-500, June.
  8. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, December.
  9. Mishkin, Frederic S, 1994. "Preventing Financial Crises: An International Perspective," The Manchester School of Economic & Social Studies, University of Manchester, vol. 62(0), pages 1-40, Suppl..
  10. Frederic S. Mishkin, 1991. "Asymmetric Information and Financial Crises: A Historical Perspective," NBER Chapters, in: Financial Markets and Financial Crises, pages 69-108 National Bureau of Economic Research, Inc.
  11. Oscar Landerretche & Felipe Morandé & Klaus Schmidt-Hebbe, 1999. "Inflation Targets and Stabilization in Chile," Working Papers Central Bank of Chile 55, Central Bank of Chile.
  12. Ben S. Bernanke, 1983. "Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression," NBER Working Papers 1054, National Bureau of Economic Research, Inc.
  13. Michael Sarel, 1996. "Nonlinear Effects of Inflation on Economic Growth," IMF Staff Papers, Palgrave Macmillan, vol. 43(1), pages 199-215, March.
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Cited by:
  1. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May.
  2. Mishkin, Frederic S., 1999. "Lessons from the Asian crisis," Journal of International Money and Finance, Elsevier, vol. 18(4), pages 709-723, August.
  3. F. Gulcin Ozkan & D. Filiz Unsal, 2012. "Global Financial Crisis, Financial Contagion, and Emerging Markets," IMF Working Papers 12/293, International Monetary Fund.
  4. D. Filiz Unsal, 2011. "Capital Flows and Financial Stability," IMF Working Papers 11/189, International Monetary Fund.
  5. Mishkin, Frederic S., 2001. "Financial policies and the prevention of financial crises in emerging market economies," Policy Research Working Paper Series 2683, The World Bank.
  6. Darvas, Zsolt & Szapáry, György, 1999. "A nemzetközi pénzügyi válságok tovaterjedése különböző árfolyamrendszerekben
    [The spread of international financial crises under various exchange-rate systems]
    ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(11), pages 945-968.
  7. Gulcin Ozkan & Filiz Unsal, . "External finance, sudden stops and financial crisis: what is different this time?," Discussion Papers 09/22, Department of Economics, University of York.
  8. Ziaei, Sayyed Mahdi, 2009. "Assess The Long Run Effects Of Monetary Policy On Bank lending,Foreign Asset and Liability In MENA Countries," MPRA Paper 14331, University Library of Munich, Germany.
  9. Frederic S. Mishkin & Andrew Crockett & Michael P. Dooley & Montek S. Ahluwalia, 2003. "Financial Policies," NBER Chapters, in: Economic and Financial Crises in Emerging Market Economies, pages 93-154 National Bureau of Economic Research, Inc.
  10. Frederic S. Mishkin, 2000. "Financial stability and the Macroeconomy," Economics wp09, Department of Economics, Central bank of Iceland.
  11. Fernando N. Oliveira, 2014. "The Market of Foreign Exchange Hedge in Brazil: Reaction of Financial Institutions to Interventions of the Central Bank," Economics Bulletin, AccessEcon, vol. 34(1), pages 174-187.
  12. Frederic S. Mishkin, 1999. "Global Financial Instability: Framework, Events, Issues," Journal of Economic Perspectives, American Economic Association, vol. 13(4), pages 3-20, Fall.
  13. Tervala, Juha, 2014. "China, the Dollar Peg and U.S. Monetary Policy," MPRA Paper 53223, University Library of Munich, Germany.

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