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The Collapse of Exchange Rate Pegs

University of Rochester

George S. Tavlas

Labor Statistics in Washington, D.C.

All pegged exchange rate arrangements are subject to predicaments that cast doubt on the ability of the policy makers to maintain the peg. This article organizes the literature dealing with the fragility of exchange rate nominal-anchor regimes around six fundamental and interrelated problems that can undermine the ability of policy makers to maintain their commitment to an exchange rate peg. It describes the regime-specific characteristics of an international monetary system comprising both floating rates and pegged rates--the operating domain of a nominal-anchor peg--that produce externalities relative to a pure float or a fixed-rate regime. Those externalities can lead to instability for small countries that peg to the currency of a large country, magnify the effects of asymmetric shocks on exchange rates against third currencies, and provide an escape mechanism that may help absolve the policy makers of the disciplinary constraint of a pure peg.

The ANNALS of the American Academy of Political and Social Science, Vol. 579, No. 1, 53-72 (2002)
DOI: 10.1177/000271620257900105


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