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Shocks and the Viability of a Fixed Exchange Rate Commitment

Author

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  • Andersen, Torben M

Abstract

The incentive to renege on a commitment to a fixed exchange rate is shown to be state contingent. A fixed exchange rate policy is not viable under `unusual' circumstances, and the incentive to violate the commitment is larger in the case of contractionary shocks than in the case of expansionary shocks. The possibility that the exchange rate regime is changed in `unusual' circumstances also has significant effects under `normal' circumstances, implying systematic devaluation expectations and output losses.

Suggested Citation

  • Andersen, Torben M, 1994. "Shocks and the Viability of a Fixed Exchange Rate Commitment," CEPR Discussion Papers 969, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:969
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    Citations

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    Cited by:

    1. Obstfeld, Maurice, 1996. "Models of currency crises with self-fulfilling features," European Economic Review, Elsevier, vol. 40(3-5), pages 1037-1047, April.
    2. Mundaca,B.G. & Strand,J., 1999. "Speculative attacks in the exchange market with a band policy : a sequential game analysis," Memorandum 01/1999, Oslo University, Department of Economics.
    3. Patrick Artus & Claude Jessua, 1996. "La spéculation," Revue Économique, Programme National Persée, vol. 47(3), pages 409-424.
    4. Mr. Piti Disyatat, 2001. "Currency Crises and Foreign Reserves: A Simple Model," IMF Working Papers 2001/018, International Monetary Fund.
    5. Pastine, Ivan, 2002. "Speculation and the decision to abandon a fixed exchange rate regime," Journal of International Economics, Elsevier, vol. 57(1), pages 197-229, June.
    6. Christian Bauer & Bernhard Herz, 2006. "Monetary and Exchange Rate Stability at the EU. Mediterranean Borders," Revue économique, Presses de Sciences-Po, vol. 57(4), pages 899-917.
    7. Ozkan, F. Gulcin & Sutherland, Alan, 1998. "A currency crisis model with an optimising policymaker," Journal of International Economics, Elsevier, vol. 44(2), pages 339-364, April.
    8. Herrendorf, Berthold, 1999. "Transparency, reputation, and credibility under floating and pegged exchange rates," Journal of International Economics, Elsevier, vol. 49(1), pages 31-50, October.
    9. Jeanne, Olivier, 1997. "Are currency crises self-fulfilling?: A test," Journal of International Economics, Elsevier, vol. 43(3-4), pages 263-286, November.
    10. Jesper Rangvid, 1997. "Deviations from long-run equilibria and probabilities of devaluations: An empirical analysis of Danish realignments," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 133(3), pages 497-522, September.
    11. Mr. Thomson Fontaine, 2005. "Currency Crises in Developed and Emerging Market Economies: A Comparative Empirical Treatment," IMF Working Papers 2005/013, International Monetary Fund.

    More about this item

    Keywords

    Commitment; Fixed Exchange Rates; Regime Shifts; State Dependence;
    All these keywords.

    JEL classification:

    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions

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