Transparency, reputation, and credibility under floating and pegged exchange rates

Herrendorf, Berthold (1999) Transparency, reputation, and credibility under floating and pegged exchange rates. Journal of International Economics, 49, (1), 31-50. (doi:10.1016/S0022-1996(98)00060-9).


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This paper shows that if the cost of importing foreign inflation and real exchange rate shocks are not too high, then the equilibrium nominal exchange rate regime for a country with a credibility problem is a peg, under which credibility is higher and inflation is lower than under a float. This holds true although devaluations of the pegged rate are assumed to be costless. The reason is that as realized inflation is not perfectly controllable, planned inflation under a float is private information. In contrast, since the exchange rate can be perfectly controlled, pegging resolves the private information problem, is more transparent, and makes reputation more effective.

Item Type: Article
Digital Object Identifier (DOI): doi:10.1016/S0022-1996(98)00060-9
ISSNs: 0022-1996 (print)
Related URLs:
Keywords: credibility, exchange rate regime choice, private information, reputation, transparency
Subjects: H Social Sciences > HB Economic Theory
Divisions : University Structure - Pre August 2011 > School of Social Sciences > Economics
ePrint ID: 33449
Accepted Date and Publication Date:
October 1999Published
Date Deposited: 14 Dec 2007
Last Modified: 06 Aug 2015 02:30

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