Credibility, Cost of Reneging and the Choice of Fixed Exchange Rate Regime

Abstract

The choice of exchange rate regime is considered for a small open economy. Assuming that different forms of fixed exchange rate regimes involve different costs of reneging, it is shown that one potential beneficial aspect of joining a monetary union with a common currency is that it is less likely to be exposed to "speculative attacks" than less formalized fixed exchange rate arrangements.

Keywords: Monetary union, fixed exchange rate, credibility, cost of reneging, multiple equilibria

JEL Classification: F33, F41