Fixed exchange rate credibility with heterogeneous expectations

John A. Carlson and Naven Valev

Journal of Macroeconomics, 2008, vol. 30, issue 4, pages 1712-1722

Abstract: After disinflation has been achieved, agents who form more sophisticated forecasts have lower confidence in the sustainability of a peg compared to less sophisticated agents. Furthermore, sustained financial stability leads to a declining proportion of sophisticated agents. Thus, the credibility of a fixed exchange rate regime grows over time partly because fewer people pay attention to the workings of the monetary regime. These results are derived in a rules-versus-discretion model of a fixed exchange rate regime with heterogeneous agents. We provide unique supporting evidence using data on expectations and information about the monetary regime from Bulgaria's currency board.

Keywords: Endogenous; inattention; Fixed-exchange-rate; credibility; Heterogeneous; expectations; Currency; boards (search for similar items in EconPapers)
Date: 2008

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Persistent link: http://EconPapers.repec.org/RePEc:eee:jmacro:v:30:y:2008:i:4:p:1712-1722

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