Fear of floating and de facto exchange rate pegs with multiple key currencies

Plümper, Thomas and Neumayer, Eric ORCID: 0000-0003-2719-7563 (2011) Fear of floating and de facto exchange rate pegs with multiple key currencies. International Studies Quarterly, 55 (4). pp. 1121-1142. ISSN 0020-8833

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Abstract

This paper adopts and develops the "fear of floating" theory to explain the decision to implement a de facto peg, the choice of anchor currency among multiple key currencies, and the role of central bank independence for these choices. We argue that since exchange rate depreciations are passed-through into higher prices of imported goods, avoiding the import of inflation provides an important motive to de facto peg the exchange rate in import-dependent countries. This study shows that the choice of anchor currency is determined by the degree of dependence of the potentially pegging country on imports from the key currency country and on imports from the key currency area, consisting of all countries which have already pegged to this key currency. The fear of floating approach also predicts that countries with more independent central banks are more likely to de facto peg their exchange rate since independent central banks are more averse to inflation than governments and can de facto peg a country's exchange rate independently of the government.

Item Type:	Article
Official URL:	http://www.wiley.com/bw/journal.asp?ref=0020-8833
Additional Information:	© 2011 International Studies Association
Divisions:	Geography & Environment
Subjects:	H Social Sciences > H Social Sciences (General) H Social Sciences > HB Economic Theory H Social Sciences > HG Finance J Political Science > JA Political science (General)
JEL classification:	E - Macroeconomics and Monetary Economics > E5 - Monetary Policy, Central Banking, and the Supply of Money and Credit > E58 - Central Banks and Their Policies F - International Economics > F3 - International Finance > F31 - Foreign Exchange O - Economic Development, Technological Change, and Growth > O2 - Development Planning and Policy > O24 - Trade Policy; Factor Movement Policy; Foreign Exchange Policy
Date Deposited:	08 Dec 2011 15:31
Last Modified:	11 Dec 2024 23:58
URI:	http://eprints.lse.ac.uk/id/eprint/40052

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