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Destabilizing Effects of Exchange-Rate Escape Clauses

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  • Obstfeld, Maurice

Abstract

This paper studies policy rules with escape clauses, analyzing as an example fixed exchange rate systems that allow member countries the freedom to realign in periods of stress. While well-designed escape-clause rules can raise society's welfare in principle, limited credibility makes it difficult to implement such rules in practice. An EMS-type institution that imposes political costs on policymakers who realign may raise welfare, but can also produce equilibria far inferior to an irrevocably fixed exchange rate. Switches between multiple equilibria may have the character of sudden speculative attacks.

Suggested Citation

  • Obstfeld, Maurice, 1996. "Destabilizing Effects of Exchange-Rate Escape Clauses," Center for International and Development Economics Research (CIDER) Working Papers 233439, University of California-Berkeley, Department of Economics.
    • Handle: RePEc:ags:ucbewp:233439
    DOI: 10.22004/ag.econ.233439
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