The Discipline Effects of Fixed Exchange Rates: The Distinction between Hard and Soft Pegs

Global Economic Review 41(1): 1-31, 2012

Posted: 27 Jan 2015

See all articles by Eric M.P. Chiu

Eric M.P. Chiu

National Chung Hsing University

Sirathorn Dechsakulthorn

DLA Piper

Stefanie Walter

University of Zurich - Institute for Political Science

Joshua Walton

Independent

Thomas D. Willett

Independent

Date Written: 2012

Abstract

There has been much interest in whether fixed exchange rates can provide a strong source of discipline over domestic monetary and fiscal policies. We argue that previous studies, however, have not paid sufficient attention to the distinction between constraint and incentive effects and that these operate quite differently for hard and soft fixes. Using annual data for 31 emerging and 32 developing countries during 19902003, our analysis implies that hard fixes should have much stronger discipline effects on money growth and inflation and our empirical study supports their prediction. Our theoretical analysis suggests that neither hard nor soft fixes are likely to provide strong discipline over fiscal policy and this is confirmed by our empirical analysis as well.

Keywords: Hard fixes, Soft pegs, discipline effects, incentive structure, macroeconomic discipline

Suggested Citation

Chiu, Eric M.P. and Dechsakulthorn, Sirathorn and Walter, Stefanie and Walton, Joshua and Willett, Thomas D., The Discipline Effects of Fixed Exchange Rates: The Distinction between Hard and Soft Pegs (2012). Global Economic Review 41(1): 1-31, 2012, Available at SSRN: https://ssrn.com/abstract=2497389

Eric M.P. Chiu

National Chung Hsing University ( email )

402, No. 250 Kuo Kuang Road, Taiwan
Taichung, Taiwan
China

Sirathorn Dechsakulthorn

DLA Piper ( email )

401 B Street
San Diego, CA 92101
United States

Stefanie Walter (Contact Author)

University of Zurich - Institute for Political Science ( email )

Dep. of International Relations
Seilergraben 49
CH-8001 Zurich
Switzerland

Joshua Walton

Independent

Thomas D. Willett

Independent

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