Shocks and the Viability of a Fixed Exchange Rate Commitment

Torben M Andersen

No 969, CEPR Discussion Papers from Centre for Economic Policy Research

Abstract: 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.

Keywords: Commitment; Fixed Exchange Rates; Regime Shifts; State Dependence (search for similar items in EconPapers)
JEL-codes: F31 F33 (search for similar items in EconPapers)
Date: 1994-06
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Citations: View citations in EconPapers (13)

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