Abstract

http://ssrn.com/abstract=1276222
 
 

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Fear of Floating and De Facto Exchange Rate Pegs with Multiple Key Currencies


Thomas Plümper


University of Essex - Department of Government

Eric Neumayer


London School of Economics and Political Science (LSE)

October 1, 2008

International Studies Quarterly, Vol. 55, No. 4, pp. 1121-1142, 2011

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 indepen¬dent central banks are more averse to inflation than governments and can de facto peg a country’s exchange rate independently of the government.

Number of Pages in PDF File: 42

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Date posted: October 3, 2008 ; Last revised: August 5, 2012

Suggested Citation

Plümper, Thomas and Neumayer, Eric, Fear of Floating and De Facto Exchange Rate Pegs with Multiple Key Currencies (October 1, 2008). International Studies Quarterly, Vol. 55, No. 4, pp. 1121-1142, 2011. Available at SSRN: http://ssrn.com/abstract=1276222

Contact Information

Thomas Plümper (Contact Author)
University of Essex - Department of Government ( email )
Wivenhoe Park
Colchester, Essex CO4 3SQ
United Kingdom
HOME PAGE: http://www.polsci.org/pluemper
Eric Neumayer
London School of Economics and Political Science (LSE) ( email )
Houghton Street
WC2A 2AE London
United Kingdom
+44 207 955 7598 (Phone)
+44 207 955 7412 (Fax)
HOME PAGE: http://personal.lse.ac.uk/neumayer
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