Sustaining Fixed Exchange Rates: A Model with Debt and Institutions

Alexander Pitt

No 2001/027, IMF Working Papers from International Monetary Fund

Abstract: Fixed exchange rate regimes have come into disrepute, as their defense has become all but impossible. Yet, while a determined attack on a currency cannot be prevented or, ultimately, withstood, policies can reduce the vulnerability of a country to such attacks. The paper develops an analytical framework of costs and benefits of a fixed exchange rate, based on the ability of a developing country to meet its external obligations while achieving a maximum rate of long-term output growth. The focus is on how structural policies and institutions influence the degree of dependence of a country on a fixed exchange rate regime.

Keywords: WP; capital account; monetary policy; risk premium; debt service; Exchange rates; currency attacks; competition policy; financial supervision; productivity; volatility vis-à-vis currency; interest rate cost; economy move; debt accumulation; debt-service cost; economic system; abandonment cost; world interest rate; costs of abandoning; exchange rate volatility; debt structure; exchange rate target; Conventional peg; Foreign direct investment; Financial sector; Return on investment; East Asia; Asia and Pacific (search for similar items in EconPapers)
Pages: 23
Date: 2001-03-01
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