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

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

42 Pages Posted: 3 Oct 2008 Last revised: 5 Aug 2012

Thomas Pluemper

Vienna University of Economics and Business - Department of Socioeconomics; University of Essex - Department of Government

Eric Neumayer

London School of Economics and Political Science (LSE)

Date Written: October 1, 2008

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.

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

Thomas Plümper (Contact Author)

Vienna University of Economics and Business - Department of Socioeconomics ( email )

Vienna
Austria

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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