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The Collapse of Exchange Rate Pegs

Author

Listed:
  • Harris Dellas

    (University of Rochester)

  • George S. Tavlas

    (Labor Statistics in Washington, D.C.)

Abstract

All pegged exchange rate arrangements are subject to predicaments that cast doubt on the ability of the policy makers to maintain the peg. This article organizes the literature dealing with the fragility of exchange rate nominal-anchor regimes around six fundamental and interrelated problems that can undermine the ability of policy makers to maintain their commitment to an exchange rate peg. It describes the regime-specific characteristics of an international monetary system comprising both floating rates and pegged rates--the operating domain of a nominal-anchor peg--that produce externalities relative to a pure float or a fixed-rate regime. Those externalities can lead to instability for small countries that peg to the currency of a large country, magnify the effects of asymmetric shocks on exchange rates against third currencies, and provide an escape mechanism that may help absolve the policy makers of the disciplinary constraint of a pure peg.

Suggested Citation

  • Harris Dellas & George S. Tavlas, 2002. "The Collapse of Exchange Rate Pegs," The ANNALS of the American Academy of Political and Social Science, , vol. 579(1), pages 53-72, January.
    • Handle: RePEc:sae:anname:v:579:y:2002:i:1:p:53-72
    DOI: 10.1177/000271620257900105
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    References listed on IDEAS

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