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Pegging and stabilization policy in developing countries

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Author Info
Ramon Moreno

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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.

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

Volume (Year): (2001)
Issue (Month): ()
Pages: 17-29
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Handle: RePEc:fip:fedfer:y:2001:p:17-29

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Keywords: Foreign exchange rates Monetary policy Economic development

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.:

  1. 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. [Downloadable!] (restricted)
  2. Carmen M. Reinhart, 2000. "Mirage of Floating Exchange Rates," American Economic Review, American Economic Association, vol. 90(2), pages 65-70, May. [Downloadable!] (restricted)
  3. Obstfeld, Maurice & Rogoff, Kenneth, 2000. "New directions for stochastic open economy models," Journal of International Economics, Elsevier, vol. 50(1), pages 117-153, February. [Downloadable!] (restricted)
    Other versions:
  4. 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. [Downloadable!] (restricted)
  5. 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.
  6. Boyer, Russell S, 1978. "Optimal Foreign Exchange Market Intervention," Journal of Political Economy, University of Chicago Press, vol. 86(6), pages 1045-55, December. [Downloadable!] (restricted)
  7. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear Of Floating," The Quarterly Journal of Economics, MIT Press, vol. 117(2), pages 379-408, May. [Downloadable!] (restricted)
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  8. Lohmann, Susanne, 1992. "Optimal Commitment in Monetary Policy: Credibility versus Flexibility," American Economic Review, American Economic Association, vol. 82(1), pages 273-86, March. [Downloadable!] (restricted)
  9. Roberto Chang & Andres Velasco, 1998. "Financial Fragility and the Exchange Rate Regime," NBER Working Papers 6469, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  10. Ramon Moreno & Bharat Trehan, 2000. "Common shocks and currency crises," Working Papers in Applied Economic Theory 2000-05, Federal Reserve Bank of San Francisco. [Downloadable!]
  11. Ramon Moreno, 2000. "Does pegging increase international trade?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue Sep 29. [Downloadable!]
  12. Chang, Roberto & Velasco, Andres, 2000. "Financial Fragility and the Exchange Rate Regime," Journal of Economic Theory, Elsevier, vol. 92(1), pages 1-34, May. [Downloadable!] (restricted)
  13. Helpman, Elhanan, 1981. "An Exploration in the Theory of Exchange-Rate Regimes," Journal of Political Economy, University of Chicago Press, vol. 89(5), pages 865-90, October. [Downloadable!] (restricted)
  14. 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. [Downloadable!] (restricted)
  15. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does the Nominal Exchange Rate Regime Matter?," NBER Working Papers 5874, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  16. Sala-i-Martin, Xavier, 1997. "I Just Ran Two Million Regressions," American Economic Review, American Economic Association, vol. 87(2), pages 178-83, May. [Downloadable!] (restricted)
  17. Levine, Ross & Renelt, David, 1992. "A Sensitivity Analysis of Cross-Country Growth Regressions," American Economic Review, American Economic Association, vol. 82(4), pages 942-63, September. [Downloadable!] (restricted)
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  18. 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. [Downloadable!] (restricted)
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Cited by:
(explanations, 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.)

  1. Ramon Moreno, 2000. "Pegging and macroeconomic performance in East Asia," Pacific Basin Working Paper Series 00-03, Federal Reserve Bank of San Francisco. [Downloadable!]
    Other versions:
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