Exchange Rate Realignments and Realignment Expectations
AbstractOne view of exchange-rate realignments is that they undermine the credibility of a fixed exchange rate by creating expectations of further realignments. This paper presents an alternative model where the private sector attaches a higher probability to a realignment when there is spare capacity in the economy. The model shows that a realignment can enhance the credibility of the fixed rate by reducing the level of spare capacity. However, it is also shown that, if realignment expectations are formed in this way, a fixed rate system may seriously destabilize the economy. Copyright 1995 by Royal Economic Society.
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Bibliographic InfoPaper provided by Department of Economics, University of York in its series Discussion Papers with number 94/3.
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Postal: Department of Economics and Related Studies, University of York, York, YO10 5DD, United Kingdom
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- Stansfield, Ed & Sutherland, Alan, 1995. "Exchange Rate Realignments and Realignment Expectations," Oxford Economic Papers, Oxford University Press, vol. 47(2), pages 211-28, April.
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- Bernd Kempa & Michael Nelles, 1999. "Misalignments of real exchange rates and the credibility of nominal currency bands," Review of World Economics (Weltwirtschaftliches Archiv), Springer, vol. 135(4), pages 613-628, December.
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