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Evaluating the effect of de facto pegs on currency crises

  • Esaka, Taro
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    This paper empirically evaluates the treatment effect of de facto pegged regimes on the occurrence of currency crises. To estimate the treatment effect of pegged regimes properly, we must carefully control for the self-selection problem of regime adoption because a country's exchange rate regime choice is nonrandom. To address the self-selection problem, we thus employ a variety of matching methods. We find interesting and robust evidence that (1) pegged regimes significantly decrease the likelihood of currency crises compared with floating regimes, and (2) pegged regimes with capital account liberalization significantly lower the likelihood of currency crises compared with other regimes. From the standpoint of the macroeconomic policy trilemma, we can reasonably conclude that pegged regimes with capital account liberalization are substantially less prone to speculative attacks because they can enhance greater credibility in their currencies by maintaining strict discipline for monetary and macroeconomic policies.

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    Article provided by Elsevier in its journal Journal of Policy Modeling.

    Volume (Year): 35 (2013)
    Issue (Month): 6 ()
    Pages: 943-963

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    Handle: RePEc:eee:jpolmo:v:35:y:2013:i:6:p:943-963
    Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505735

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