The Mirage of Fixed Exchange Rates

Maurice Obstfeld, Kenneth Rogoff

The Journal of Economic Perspectives · 1995 · 87 citations · 5 references

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TL;DR

Industrialized‑country monetary authorities can defend exchange parities against speculative attacks, but a lack of credible commitment can make defending a peg costly to the broader economy. The paper examines the challenges of sustaining fixed exchange rates amid expanding global capital markets and the limited success of such regimes. The dynamic interplay between credibility and commitment is illustrated by the 1992 Swedish and British crises and the 1994‑95 Mexican collapse.

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 and the 1994-95 Mexican collapse. The authors also discuss the small number of successful fixers.

References

5