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).

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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
Digital Object Identifier (DOI): doi:10.1016/S0022-1996(98)00060-9
ISSNs: 0022-1996 (print)
Keywords: credibility, exchange rate regime choice, private information, reputation, transparency
Subjects:
ePrint ID: 33449
Date :
Date Event
October 1999Published
Date Deposited: 14 Dec 2007
Last Modified: 16 Apr 2017 22:15
Further Information:Google Scholar
URI: http://eprints.soton.ac.uk/id/eprint/33449

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