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Journal of Economic Perspectives: Vol. 9 No. 4 (Fall 1995)

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The Mirage of Fixed Exchange Rates

Article Citation

Obstfeld, Maurice, and Kenneth Rogoff. 1995. "The Mirage of Fixed Exchange Rates." Journal of Economic Perspectives, 9(4): 73-96.

DOI: 10.1257/jep.9.4.73

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.

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Authors

Obstfeld, Maurice (U CA Berkeley)
Rogoff, Kenneth (Princeton U)

JEL Classifications

F33: International Monetary Arrangements and Institutions
E42: Monetary Systems; Standards; Regimes; Government and the Monetary System; Payment Systems

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