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

Research output: Contribution to journalArticlepeer-review

20 Scopus citations

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 1 1999
Externally publishedYes

Keywords

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

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics

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