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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), pp. 31-50. (doi:10.1016/S0022-1996(98)00060-9).

Record type: Article


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


Local EPrints ID: 33449
ISSN: 0022-1996
PURE UUID: ae1cf302-5b07-47a9-8b3d-f85f69c9b8dd

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Date deposited: 14 Dec 2007
Last modified: 17 Jul 2017 15:52

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Author: Berthold Herrendorf

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