Explaining the Duration of Exchange-Rate Pegs / Michael W. Klein, Nancy P. Marion.

Format:

Book

Author/Creator:

Klein, Michael W.

Contributor:

National Bureau of Economic Research.

Marion, Nancy P.

Series:

Working Paper Series (National Bureau of Economic Research) no. w4651.

NBER working paper series no. w4651

Language:

English

Physical Description:

1 online resource: illustrations (black and white);

Place of Publication:

Cambridge, Mass. National Bureau of Economic Research 1994.

Summary:

This paper is a theoretical and empirical investigation into the duration of exchange-rate pegs. The theoretical model considers a policy-maker who must trade off the economic costs of real exchange- rate misalignment against the political cost of realignment. The optimal time to spend on a peg is derived and factors that influence peg duration are identified. The predictions of the model are tested using logit analysis with a data set of exchange-rate pegs for sixteen Latin American countries and Jamaica during the 1957-1991 period. We find that the real exchange rate is a significant determinant of the likelihood of a devaluation. Structural variables, such as the openness of the economy and its geographical trade concentration, also significantly affect the likelihood of a devaluation. Finally, political events that change the political cost of realignment, such as regular and irregular executive transfers, are empirically important determinants of the likelihood of a devaluation.

Notes:

Print version record

February 1994.