DP969 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, State Dependence|
|Programme Areas:||International Macroeconomics|
|Link to this Page:||cepr.org/active/publications/discussion_papers/dp.php?dpno=969|
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.