Transparency, reputation, and credibility under floating and pegged exchange rates

Research output: Contribution to journalArticle

20 Citations (Scopus)

Abstract

This paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high, then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg, under which credibility is higher and inflation is lower than under a float. This holds true although devaluations of the pegged rate are assumed to be costless. The reason is that as realized inflation is not perfectly controllable, planned inflation under a float is private information. In contrast, since the exchange rate can be perfectly controlled, pegging resolves the private information problem, is more transparent, and makes reputation more effective.

Original languageEnglish (US)
Pages (from-to)31-50
Number of pages20
JournalJournal of International Economics
Volume49
Issue number1
DOIs
StatePublished - Oct 1999
Externally publishedYes

Fingerprint

Transparency
Floating
Exchange rates
Inflation
Credibility
Float
Private information
Importing
Costs
Real exchange rate
Exchange rate regimes
Devaluation
Nominal exchange rate

Keywords

  • Credibility
  • Exchange rate regime choice
  • Private information
  • Reputation
  • Transparency

ASJC Scopus subject areas

  • Economics and Econometrics
  • Finance

Cite this

Transparency, reputation, and credibility under floating and pegged exchange rates. / Herrendorf, Berthold.

In: Journal of International Economics, Vol. 49, No. 1, 10.1999, p. 31-50.

Research output: Contribution to journalArticle

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