Destabilizing Effects of Exchange-Rate Escape Clauses

This paper studies policy rules with escape clauses, analyzing as an example fixed exchange rate systems that allow member countries the freedom to realign in periods of stress. While well-designed escape-clause rules can raise society's welfare in principle, limited credibility makes it difficult to implement such rules in practice. An EMS-type institution that imposes political costs on policymakers who realign may raise welfare, but can also produce equilibria far inferior to an irrevocably fixed exchange rate. Switches between multiple equilibria may have the character of sudden speculative attacks.


Issue Date:
1996-12
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/233439
Total Pages:
36
JEL Codes:
431
Series Statement:
Working Paper
C96-075




 Record created 2017-04-01, last modified 2017-08-29

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