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Consistency versus credibility: how do countries choose their exchange rate regime?

  • Fabrizio Carmignani


    (United Nations Economic Commission for Europe)

  • Emilio Colombo


    (Department of Economics, University of Milan-Bicocca)

  • Patrizio Tirelli


    (Department of Economics, University of Milan-Bicocca)

The empirical distinction between de facto and de jure exchange rate regimes raises a number of interesting questions. Which factors may induce a de facto peg? Why do countries enforce a peg but do not announce it? Why do countries \break their promises"? We show that a stable socio-political and an e±cient political decision-making process are a necessary prerequisite for choosing a peg and sticking to it, challenging the view that sees the exchange rate as a commitment device. Policymakers seem rather concerned with regime sustainability in the face of adverse economic and socio political fundamentals.

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Paper provided by University of Milano-Bicocca, Department of Economics in its series Working Papers with number 85.

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Length: 38 pages
Date of creation: Oct 2004
Date of revision: Feb 2005
Handle: RePEc:mib:wpaper:85
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