We build a model of a fixed exchange rate regime with escape clauses and output persistence. In the spirit of the Asian crisis in 1997, persistence in our model arises from inability of the domestic financial institutions to intermediate international credit. Our main message is that since persistence generates long run distortions that are sensitive to the prevailing policy preferences, the choice of an optimal exchange rate regime and the preference for a policy target should reflect the degree of development of the domestic financial institutions.
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Length: 23 pages Date of creation: 1999 Date of revision: Handle: RePEc:fth:helsec:465
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Find related papers by JEL classification: E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations