Pegged Exchange Rate Regimes—A Trap?

Joshua Aizenman and Reuven Glick

Journal of Money, Credit and Banking, 2008, vol. 40, issue 4, 817-835

Abstract: We analyze the role of an exchange rate peg as a commitment mechanism to achieve inflation stability when multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative regime not only in order to mitigate inflation bias from time inconsistency but also to avoid high inflation equilibria. In these circumstances, using a pegged exchange rate as an anti‐inflation commitment device can create a “trap” whereby the regime initially confers gains in anti‐inflation credibility but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy.

Date: 2008
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https://doi.org/10.1111/j.1538-4616.2008.00138.x

Related works:
Journal Article: Pegged Exchange Rate Regimes-A Trap? (2008)
Working Paper: Pegged Exchange Rate Regimes – A Trap? (2005)
Working Paper: Pegged exchange rate regimes -- a trap? (2005)
Working Paper: Pegged Exchange Rate Regimes -- A Trap? (2005)
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Persistent link: https://EconPapers.repec.org/RePEc:wly:jmoncb:v:40:y:2008:i:4:p:817-835

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