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Fixed exchange rate credibility with heterogeneous expectations

  • Carlson, John A.
  • Valev, Naven

After disinflation has been achieved, agents who form more sophisticated forecasts have lower confidence in the sustainability of a peg compared to less sophisticated agents. Furthermore, sustained financial stability leads to a declining proportion of sophisticated agents. Thus, the credibility of a fixed exchange rate regime grows over time partly because fewer people pay attention to the workings of the monetary regime. These results are derived in a rules-versus-discretion model of a fixed exchange rate regime with heterogeneous agents. We provide unique supporting evidence using data on expectations and information about the monetary regime from Bulgaria's currency board.

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Article provided by Elsevier in its journal Journal of Macroeconomics.

Volume (Year): 30 (2008)
Issue (Month): 4 (December)
Pages: 1712-1722

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Handle: RePEc:eee:jmacro:v:30:y:2008:i:4:p:1712-1722
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/622617

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