Advanced Search
MyIDEAS: Login to save this article or follow this journal

Pegging and stabilization policy in developing countries

Contents:

Author Info

  • Ramon Moreno

Abstract

I review the case for pegging the exchange rate by surveying the recent theoretical literature on the choice of exchange rate regimes. This literature suggests that by enhancing the transparency or controllability of monetary policy, pegging may be more effective in lowering inflation expectations than other targets (such as money growth). However, under certain conditions a peg may be vulnerable to shifts in expectations. A peg also may require greater fiscal restraint by limiting the availability of inflation tax revenue; however, given certain economic distortions, policymakers may find it less costly to adopt expansionary fiscal policies under a peg than under a float. Pegging may stimulate growth by enhancing international trade or investment. However, it may reduce welfare by restricting the ability of policymakers to offset shocks. I also examine how pegging is associated with inflation and output in a sample of developing countries using a new exchange rate classification method. I find that a pegged exchange rate is associated with lower inflation and inflation volatility and with faster growth and similar output volatility. However, the theoretical survey suggests that any inferences should be drawn with care.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.frbsf.org/economic-research/publications/2001/article2-3.pdf
Download Restriction: no

Bibliographic Info

Article provided by Federal Reserve Bank of San Francisco in its journal Economic Review.

Volume (Year): (2001)
Issue (Month): ()
Pages: 17-29

as in new window
Handle: RePEc:fip:fedfer:y:2001:p:17-29

Contact details of provider:
Postal: P.O. Box 7702, San Francisco, CA 94120-7702
Phone: (415) 974-2000
Fax: (415) 974-3333
Email:
Web page: http://www.frbsf.org/
More information through EDIRC

Order Information:
Email:

Related research

Keywords: Foreign exchange rates ; Monetary policy ; Economic development;

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Reuven Glick & Ramon Moreno & Mark Spiegel, 2001. "Financial crises in emerging markets," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue mar.23.
  2. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc.
  3. Robert Dekle & Cheng Hsiao & Siyan Wang, 1999. "Interest rate stabilization of exchange rates and contagion in the Asian crisis countries," Proceedings, Federal Reserve Bank of San Francisco, issue Sep.
  4. Salant, Stephen W & Henderson, Dale W, 1978. "Market Anticipations of Government Policies and the Price of Gold," Journal of Political Economy, University of Chicago Press, vol. 86(4), pages 627-48, August.
  5. Robert J. Barro & David B. Gordon, 1983. "Rules, Discretion and Reputation in a Model of Monetary Policy," NBER Working Papers 1079, National Bureau of Economic Research, Inc.
  6. Craig Burnside & Martin Eichenbaum & Sergio Rebelo, 1998. "Prospective Deficits and the Asian Currency Crisis," NBER Working Papers 6758, National Bureau of Economic Research, Inc.
  7. Sebastian Edwards & Miguel A. Savastano, 1999. "Exchange Rates in Emerging Economies: What Do We Know? What Do We Need to Know?," NBER Working Papers 7228, National Bureau of Economic Research, Inc.
  8. Maurice Obstfeld & Kenneth Rogoff, 2000. "New Directions for Stochastic Open Economy Models," International Finance 0004002, EconWPA.
  9. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  10. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
  11. Reinhart, Carmen & Calvo, Guillermo & Leiderman, Leonardo, 1993. "“Capital Inflows and Real Exchange Rate Appreciation in Latin America: The Role of External Factors," MPRA Paper 7125, University Library of Munich, Germany.
  12. Stephen W. Salant & Dale W. Henderson, 1976. "Market anticipations, government policy, and the price of gold," International Finance Discussion Papers 81, Board of Governors of the Federal Reserve System (U.S.).
  13. Canavan, Chris & Tommasi, Mariano, 1997. "On the credibility of alternative exchange rate regimes," Journal of Development Economics, Elsevier, vol. 54(1), pages 101-122, October.
  14. Stanley Fischer, 1993. "The Role of Macroeconomic Factors in Growth," NBER Working Papers 4565, National Bureau of Economic Research, Inc.
  15. Sebastian Edwards, 1993. "Trade Policy, Exchange Rates and Growth," NBER Working Papers 4511, National Bureau of Economic Research, Inc.
  16. 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.
  17. Ramon Moreno & Bharat Trehan, 2000. "Common shocks and currency crises," Working Paper Series 2000-05, Federal Reserve Bank of San Francisco.
  18. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December.
  19. Ramon Moreno, 2000. "Does pegging increase international trade?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue sep29.
  20. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Scholarly Articles 3445091, Harvard University Department of Economics.
  21. Tornell, Aaron & Velasco, Andres, 2000. "Fixed versus flexible exchange rates: Which provides more fiscal discipline?," Journal of Monetary Economics, Elsevier, vol. 45(2), pages 399-436, April.
  22. Herrendorf, Berthold, 1999. "Transparency, reputation, and credibility under floating and pegged exchange rates," Journal of International Economics, Elsevier, vol. 49(1), pages 31-50, October.
  23. Maurice Obstfeld & Kenneth S. Rogoff, 1996. "Foundations of International Macroeconomics," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262150476, December.
  24. Chin, Daniel M. & Miller, Preston J., 1998. "Fixed vs. floating exchange rates: A dynamic general equilibrium analysis," European Economic Review, Elsevier, vol. 42(7), pages 1221-1249, July.
  25. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  26. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Petreski, Marjan, 2009. "Exchange-rate regime and economic growth: a review of the theoretical and empirical literature," Economics Discussion Papers 2009-31, Kiel Institute for the World Economy.
  2. Petreski, Marjan, 2009. "Analysis of exchange-rate regime effect on growth: theoretical channels and empirical evidence with panel data," Economics Discussion Papers 2009-49, Kiel Institute for the World Economy.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:fip:fedfer:y:2001:p:17-29. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Diane Rosenberger).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.