Pegged exchange rate regimes - A trap

Joshua Aizenman, Reuven Glick

Research output: Contribution to journalShort surveypeer-review

14 Scopus citations


We analyze the role of an exchange rate peg as a commitment mechanism to achieve inflation stability when multiple equilibria are possible. We show that there are ex ante large gains from choosing a more conservative regime not only in order to mitigate inflation bias from time inconsistency but also to avoid high inflation equilibria. In these circumstances, using a pegged exchange rate as an anti-inflation commitment device can create a "trap" whereby the regime initially confers gains in anti-inflation credibility but ultimately results in an exit occasioned by a big enough adverse real shock that creates large welfare losses to the economy.

Original languageEnglish
Pages (from-to)817-835
Number of pages19
JournalJournal of Money, Credit and Banking
Issue number4
StatePublished - 1 Jan 2008
Externally publishedYes


  • Credibility
  • Crises
  • Discretion
  • Duration
  • Monetary regime change
  • Pegged exchange rate

ASJC Scopus subject areas

  • Accounting
  • Finance
  • Economics and Econometrics


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