Premium
On the Exchange Rate as a Nominal Anchor: The Rise and Fall of the Credibility Hypothesis
Author(s) -
TAVLAS GEORGE S.
Publication year - 2000
Publication title -
economic record
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.365
H-Index - 42
eISSN - 1475-4932
pISSN - 0013-0249
DOI - 10.1111/j.1475-4932.2000.tb00016.x
Subject(s) - credibility , exchange rate , economics , currency , exchange rate regime , currency crisis , fragility , international fisher effect , monetary economics , international economics , nominal interest rate , macroeconomics , real interest rate , monetary policy , political science , chemistry , law
The credibility hypothesis, which was used to support the use of a pegged exchange rate arrangement as a nominal anchor mechanism, is based on restrictive analytical foundations that circumscribe its real world applicability. While all pegged exchange rate arrangements are subject to circumstances that can undermine the sustainability of the peg, exchange rate nominal anchor pegs are especially fragile because such arrangements introduce problems that are endogenous to that particular type of regime. The East Asian crisis is used to demonstrate the fragility of exchange rate nominal anchor pegs, while the case of Australia demonstrates how a floating currency escaped the contagion of the East Asian crisis.