Capital Market Development, Corporate Governance and the Credibility of Exchange Rate Pegs

Olli Castren and Tuomas Takalo
Additional contact information
Olli Castren: European Central Bank

No 515, Econometric Society World Congress 2000 Contributed Papers from Econometric Society

Abstract: We build a model of a fixed exchange rate regime with escape clauses and output persistence. In the spirit of the literature following the Asian crisis in 1997, persistence in our model arises from the inability of the domestic financial institutions to intermediate international credit. Our main message is that since persistence generates long run credibility effects that are sensitive to the prevailing policy preferences, the choice of an optimal exchange rate regime and the preference for a policy target should reflect the degree of development of the domestic financial institutions. If the domestic financial market suffers from credit constraints that generate persistence, the likelihood of self-fulfilling currency crisis may be reduced if the government assigns a greater weight on the output stabilisation objective. However, if financial market liberalisation successfully eliminates the credit constraints, liberalisation should be associated with a switch in policy preferences more in favour of exchange rate stability.

Date: 2000-08-01
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (9)

Downloads: (external link)
http://fmwww.bc.edu/RePEc/es2000/0515.pdf main text (application/pdf)

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:ecm:wc2000:0515

Access Statistics for this paper

More papers in Econometric Society World Congress 2000 Contributed Papers from Econometric Society Contact information at EDIRC.
Bibliographic data for series maintained by Christopher F. Baum ().