Explaining the Duration of Exchange-Rate Pegs

29 Pages Posted: 12 Jun 2000 Last revised: 20 Sep 2010

See all articles by Michael W. Klein

Michael W. Klein

Tufts University - The Fletcher School of Law and Diplomacy; National Bureau of Economic Research (NBER)

Nancy Peregrim Marion

Dartmouth College - Department of Economics

Date Written: February 1994

Abstract

This paper is a theoretical and empirical investigation into the duration of exchange-rate pegs. The theoretical model considers a policy-maker who must trade off the economic costs of real exchange- rate misalignment against the political cost of realignment. The optimal time to spend on a peg is derived and factors that influence peg duration are identified. The predictions of the model are tested using logit analysis with a data set of exchange-rate pegs for sixteen Latin American countries and Jamaica during the 1957-1991 period. We find that the real exchange rate is a significant determinant of the likelihood of a devaluation. Structural variables, such as the openness of the economy and its geographical trade concentration, also significantly affect the likelihood of a devaluation. Finally, political events that change the political cost of realignment, such as regular and irregular executive transfers, are empirically important determinants of the likelihood of a devaluation.

Suggested Citation

Klein, Michael W. and Marion, Nancy P., Explaining the Duration of Exchange-Rate Pegs (February 1994). NBER Working Paper No. w4651, Available at SSRN: https://ssrn.com/abstract=232056

Michael W. Klein (Contact Author)

Tufts University - The Fletcher School of Law and Diplomacy ( email )

Medford, MA 02155
United States
617-627-2718 (Phone)
617-627-3712 (Fax)

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Nancy P. Marion

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
(603) 646-2511 (Phone)

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