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Title: Shocks and the Viability of a Fixed Exchange Rate Commitment

Author(s): Torben M Andersen

Publication Date: June 1994

Keyword(s): Commitment, Fixed Exchange Rates, Regime Shifts and State Dependence

Programme Area(s): International Macroeconomics

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.

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Bibliographic Reference

Andersen, T. 1994. 'Shocks and the Viability of a Fixed Exchange Rate Commitment'. London, Centre for Economic Policy Research. https://cepr.org/active/publications/discussion_papers/dp.php?dpno=969