Pegs, Risk Management, And Financial Crises
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(0)Overview: This paper develops a simple micro-founded model of pegs and currency crises. Its basic point is that a country may adhere to a fixed exchange rate regime in order to signal strong fundamentals and thereby either facilitate the corporate sector’s access to international borrowing or increase the government’s chances of re-election; and that policy decisions come as a package: Signaling strong fundamentals requires not only setting and defending an ambitious peg, but also discouraging (or at least not encouraging) country hedging, allowing for short maturity structures, and so forth.
