Fixed Exchange Rate Credibility with Heterogeneous Expectations
25 Pages Posted: 6 Apr 2006
Date Written: March 2006
Abstract
After disinflation has been achieved, agents who form more sophisticated forecasts have lower confidence in the sustainability of a peg compared to less sophisticated agents. Furthermore, sustained financial stability leads to a declining proportion of sophisticated agents. Thus, the credibility of a fixed exchange rate regime grows over time partly because fewer people pay attention to the workings of the monetary regime. These results are derived in a rules-versus-discretion model of a fixed exchange rate regime with heterogeneous agents. We provide unique supporting evidence using data on expectations and information about the monetary regime from Bulgaria's currency board.
Keywords: Endogenous inattention, Fixed-exchange-rate credibility, Heterogeneous expectations, Currency boards
JEL Classification: E5, F3
Suggested Citation: Suggested Citation
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