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Shocks and the Viability of a Fixed Exchange Rate Commitment

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Author Info
Andersen, Torben M
Abstract

The incentive to renege on a commitment to a fixed exchange rate is shown to be state contingent. A fixed exchange rate policy is not viable under `unusual' circumstances, and the incentive to violate the commitment is larger in the case of contractionary shocks than in the case of expansionary shocks. The possibility that the exchange rate regime is changed in `unusual' circumstances also has significant effects under `normal' circumstances, implying systematic devaluation expectations and output losses.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 969.

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Date of creation: Jun 1994
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Handle: RePEc:cpr:ceprdp:969

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Related research
Keywords: Commitment; Fixed Exchange Rates; Regime Shifts; State Dependence;

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Find related papers by JEL classification:
F31 - International Economics - - International Finance - - - Foreign Exchange
F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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  1. Thomson Fontaine, 2005. "Currency Crises in Developed and Emerging Market Economies: A Comparative Empirical Treatment," IMF Working Papers 05/13, International Monetary Fund. [Downloadable!]
  2. Maurice Obstfeld, 1997. "Models of Currency Crises with Self-Fulfilling Features," NBER Working Papers 5285, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
    Other versions:
  3. Mundaca,B.G. & Strand,J., 1999. "Speculative attacks in the exchange market with a band policy : a sequential game analysis," Memorandum 01/1999, Oslo University, Department of Economics. [Downloadable!]
  4. Jesper Rangvid, 1997. "Deviations from long-run equilibria and probabilities of devaluations: An empirical analysis of Danish realignments," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 133(3), pages 497-522, September. [Downloadable!] (restricted)
  5. Pastine, Ivan, 2001. "Speculation and the Decision to Abandon a Fixed Exchange Rate Regime," CEPR Discussion Papers 2893, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  6. Christian Bauer & Bernhard Herz, 2006. "Monetary and Exchange Rate Stability at the EU Mediterranean Borders," Macroeconomics, Department of Economics, Economics I, Bayreuth University, vol. 57(Paris (4)), pages 899-917. [Downloadable!]
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