Exchange rate realignments and realignment expectations

E STANSFIELD, A SUTHERLAND

    Research output: Contribution to journalArticlepeer-review

    6 Citations (Scopus)

    Abstract

    One view of exchange rate realignments is that they undermine the credibility of a fixed exchange rate by creating expectations of further realignments. This paper presents an alternative model where the private sector attaches a higher probability to a realignment when there is spare capacity in the economy. The model shows that a realignment can enhance the credibility of the fixed rate by reducing the level of spare capacity. However, it is also shown that if realignment expectations are formed in this way, a fixed rate system may seriously destabilise the economy.

    Original languageEnglish
    Pages (from-to)211-228
    Number of pages18
    JournalOxford Economic Papers
    Volume47
    Issue number2
    Publication statusPublished - Apr 1995

    Keywords

    • INFLATION CONVERGENCE

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