Working Paper

The mirage of fixed exchange rates

Abstract: This paper discusses the profound difficulties of maintaining fixed exchange rates in a world of expanding global capital markets. Contrary to popular wisdom, industrialized-country monetary authorities easily have the resources to defend exchange parities against virtually any private speculative attack. But if their commitment to use those resources lacks credibility with markets, the costs to the broader economy of defending an exchange-rate peg can be very high. The dynamic interplay between credibility and commitment is illustrated by the 1992 Swedish and British crises.

Keywords: Foreign exchange - Law and legislation; Peso, Mexican;

Status: Published in Conference on Monetary Policy in a Changing Financial Environment ; Journal of Economic Perspectives (Fall 1995, v. 9, no. 4, p73-96)

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Working Papers in Applied Economic Theory

Publication Date: 1995

Number: 95-08