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Exchange Rate Realignments and Realignment Expectations


  • Ed Stansfield
  • Alan Sutherland


One 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.
(This abstract was borrowed from another version of this item.)

Suggested Citation

  • Ed Stansfield & Alan Sutherland, "undated". "Exchange Rate Realignments and Realignment Expectations," Discussion Papers 94/3, Department of Economics, University of York.
  • Handle: RePEc:yor:yorken:94/3

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    References listed on IDEAS

    1. Miller, Marcus & Weller, Paul, 1991. "Exchange Rate Bands with Price Inertia," Economic Journal, Royal Economic Society, vol. 101(409), pages 1380-1399, November.
    2. Giuseppe Bertola & Lars E. O. Svensson, 1993. "Stochastic Devaluation Risk and the Empirical Fit of Target-Zone Models," Review of Economic Studies, Oxford University Press, vol. 60(3), pages 689-712.
    3. William Poole, 1969. "Optimal choice of monetary policy instruments in a simple stochastic macro model," Special Studies Papers 2, Board of Governors of the Federal Reserve System (U.S.).
    4. Dornbusch, Rudiger, 1976. "Expectations and Exchange Rate Dynamics," Journal of Political Economy, University of Chicago Press, vol. 84(6), pages 1161-1176, December.
    5. Artis, M J & Currie, D A, 1981. "Monetary Targets and the Exchange Rate: A Case for Conditional Targets," Oxford Economic Papers, Oxford University Press, vol. 33(0), pages 176-200, Supplemen.
    6. Svensson, Lars E. O., 1991. "Target zones and interest rate variability," Journal of International Economics, Elsevier, vol. 31(1-2), pages 27-54, August.
    7. Paul R. Krugman, 1991. "Target Zones and Exchange Rate Dynamics," The Quarterly Journal of Economics, Oxford University Press, vol. 106(3), pages 669-682.
    8. Bertola, Giuseppe & Caballero, Ricardo J, 1992. "Target Zones and Realignments," American Economic Review, American Economic Association, vol. 82(3), pages 520-536, June.
    9. William Poole, 1970. "Optimal Choice of Monetary Policy Instruments in a Simple Stochastic Macro Model," The Quarterly Journal of Economics, Oxford University Press, vol. 84(2), pages 197-216.
    10. Beetsma, R.M.W.J. & van der Ploeg, F., 1992. "Exchange rate bands and optimal monetary accomodation under a dirty float," Discussion Paper 1992-13, Tilburg University, Center for Economic Research.
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    Cited by:

    1. Bernd Kempa & Michael Nelles, 1999. "Misalignments of real exchange rates and the credibility of nominal currency bands," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 135(4), pages 613-628, December.

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