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Shocks and the Viability of a Fixed Exchange Rate Commitment

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  • Andersen, Torben M
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    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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    Bibliographic Info

    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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    Cited by:
    1. 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.
    2. Ivan Pastine, 2000. "Speculation and the Decision to Abandon a Fixed Exchange Rate Regime," Econometric Society World Congress 2000 Contributed Papers 0931, Econometric Society.
    3. Obstfeld, Maurice, 1996. "Models of Currency Crises with Self-fulfilling Features," CEPR Discussion Papers 1315, C.E.P.R. Discussion Papers.
    4. Piti Disyatat, 2001. "Currency Crises and Foreign Reserves: A Simple Model," IMF Working Papers 01/18, International Monetary Fund.
    5. Gulcin Ozkan & Alan Sutherland, . "A Currency Crisis Model with an Optimising Policymaker," Discussion Papers 96/11, Department of Economics, University of York.
    6. 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.
    7. Thomson Fontaine, 2005. "Currency Crises in Developed and Emerging Market Economies: A Comparative Empirical Treatment," IMF Working Papers 05/13, International Monetary Fund.
    8. 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.
    9. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.

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