Gains from commitment: The case for pegging the exchange rate

Kai Arvai and Ricardo Duque Gabriel

Journal of International Money and Finance, 2025, vol. 158, issue C

Abstract: This paper argues that the exchange rate regime matters for inflation and economic activity, with substantial benefits arising from a currency peg. At the heart of these benefits lies an increase in credibility that reduces the inflationary bias once central banks commit to pegging their currency to a credible anchor. Using an open economy model, we provide a credibility estimate for 170 economies for 1950–2019 which aligns with other central bank independence measures. We document that committing to a peg persistently lowers inflation and its volatility while increasing real economic growth. Less credible countries benefit more from fixing the exchange rate.

Keywords: Exchange rate regimes; Monetary policy; Interest rates; Inflation (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 F41 F42 (search for similar items in EconPapers)
Date: 2025
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:158:y:2025:i:c:s026156062500138x

DOI: 10.1016/j.jimonfin.2025.103403

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