International Studies Quarterly, Vol. 55, No. 4, pp. 1121-1142, 2011
42 Pages Posted: 3 Oct 2008 Last revised: 5 Aug 2012
Date Written: October 1, 2008
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.
Suggested Citation: Suggested Citation
Pluemper, 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: https://ssrn.com/abstract=1276222