Transparency, reputation, and credibility under floating and pegged exchange rates
Transparency, reputation, and credibility under floating and pegged exchange rates
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.
credibility, exchange rate regime choice, private information, reputation, transparency
31-50
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
October 1999
Herrendorf, Berthold
3cf68f14-808a-42a7-9642-85b757775096
Herrendorf, Berthold
(1999)
Transparency, reputation, and credibility under floating and pegged exchange rates.
Journal of International Economics, 49 (1), .
(doi:10.1016/S0022-1996(98)00060-9).
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.
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Published date: October 1999
Keywords:
credibility, exchange rate regime choice, private information, reputation, transparency
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Local EPrints ID: 33449
URI: http://eprints.soton.ac.uk/id/eprint/33449
ISSN: 0022-1996
PURE UUID: ae1cf302-5b07-47a9-8b3d-f85f69c9b8dd
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Date deposited: 14 Dec 2007
Last modified: 15 Mar 2024 07:44
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Author:
Berthold Herrendorf
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