To Peg or not to Peg? A Simple Model of Exchange Rate Regime Choice in Small Economies

Type/nr R14/01
Skrevet av Helge Berger, Henrik Jensen and Guttorm Schjelderup
The choice of an exchange rate peg often points to a trade-off between gaining credibility and losing flexibility. We show that the flexibility loss may be reduced if domestic and foreign shocks are correlated and more volatile. Allowing for a plausible structural change after a peg, a flexibility gain may result.
Språk Skrevet på engelsk