The Discipline Effects of Fixed Exchange Rates: Constraint versus Incentive Effects and the Distinction between Hard and Soft Pegs

Eric M.P. Chiu, Sirathorn B.J. Dechsakulthorn, Stefanie Walter, Joshua C. Walton and Thomas D. Willett

Global Economic Review, 2012, vol. 41, issue 1, 1-31

Abstract: There has been much interest in whether fixed exchange rates can provide a strong source of discipline over domestic monetary and fiscal policies. We argue that previous studies, however, have not paid sufficient attention to the distinction between constraint and incentive effects and that these operate quite differently for hard and soft fixes. Using annual data for 31 emerging and 32 developing countries during 1990--2003, our analysis implies that hard fixes should have much stronger discipline effects on money growth and inflation and our empirical study supports their prediction. Our theoretical analysis suggests that neither hard nor soft fixes are likely to provide strong discipline over fiscal policy and this is confirmed by our empirical analysis as well.

Date: 2012
References: Add references at CitEc
Citations: View citations in EconPapers (1)

Downloads: (external link)
http://hdl.handle.net/10.1080/1226508X.2012.655026 (text/html)
Access to full text is restricted to subscribers.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:taf:glecrv:v:41:y:2012:i:1:p:1-31

Ordering information: This journal article can be ordered from
http://www.tandfonline.com/pricing/journal/RGER20

DOI: 10.1080/1226508X.2012.655026

Access Statistics for this article

Global Economic Review is currently edited by Kap-Young Jeong and Taeyoon Sung

More articles in Global Economic Review from Taylor & Francis Journals
Bibliographic data for series maintained by Chris Longhurst ().