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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Description/Abstract

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
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
Date Deposited: 14 Dec 2007
Last Modified: 27 Mar 2014 18:20
URI: http://eprints.soton.ac.uk/id/eprint/33449

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