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Pegging Out: Lessons from the Czech Exchange Rate Crisis

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  • Begg, David

Abstract

In May 1997 the Czech Republic abandoned its exchange rate peg, the centrepiece of macroeconomic strategy since 1991. I examine the usefulness of theories of speculative attack in interpreting the crisis. Significantly, after the crisis subsided, competitiveness returned to its earlier level. One intepretation is that the koruna was the innocent victim of turmoil in Asia. This neglects the trend deterioration of competitiveness prior to the crisis. I therefore conclude that the crisis provoked a much-needed adjustment in fiscal policy, which altered the monetary-fiscal mix and consequent equilibrium exchange rate. Sterilization during 1994-6 unhelpfully delayed adjustment. Earlier abandonment of the parity would have helped only if it had also induced the required fiscal adjustment.

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Bibliographic Info

Article provided by Elsevier in its journal Journal of Comparative Economics.

Volume (Year): 26 (1998)
Issue (Month): 4 (December)
Pages: 669-690

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Handle: RePEc:eee:jcecon:v:26:y:1998:i:4:p:669-690

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Web page: http://www.elsevier.com/locate/inca/622864

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  1. Maurice Obstfeld, 1995. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc.
  2. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  3. Velasco, Andres, 1996. "Fixed exchange rates: Credibility, flexibility and multiplicity," European Economic Review, Elsevier, Elsevier, vol. 40(3-5), pages 1023-1035, April.
  4. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262150476, December.
  5. Guillermo A. Calvo & Leonardo Leiderman & Carmen M. Reinhart, 1996. "Inflows of Capital to Developing Countries in the 1990s," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 10(2), pages 123-139, Spring.
  6. Sachs, Jeffrey D, 1996. "Economic Transition and the Exchange-Rate Regime," American Economic Review, American Economic Association, American Economic Association, vol. 86(2), pages 147-52, May.
  7. László Halpern & Charles Wyplosz, 1997. "Equilibrium Exchange Rates in Transition Economies," IMF Staff Papers, Palgrave Macmillan, Palgrave Macmillan, vol. 44(4), pages 430-461, December.
  8. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, Elsevier, vol. 17(1-2), pages 1-13, August.
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