Citation

Willett TD. World Econ. 2007; 30(5): 709-732.

Copyright

(Copyright © 2007, John Wiley and Sons)

DOI

10.1111/j.1467-9701.2007.01023.x

PMID

unavailable

Abstract

The contribution of sticky exchange rates to the rash of currency crises over the past decade has become a major topic of international monetary analysis and policy discussion. While there is widespread agreement among economists that the middle of the exchange rate spectrum, adjustable pegs, is highly crisis-prone in a world of substantial capital mobility, Jeffrey Frankel has recently argued that, surprisingly, we lack a clear theoretical rationale for why this is so. This paper attempts to fill that void. It argues that Frankel is correct in terms of economic analysis alone, but that when political economy considerations are introduced then a satisfactory explanation is at hand. Key aspects of this political economy perspective are laid out and implications for exchange rate policy are considered. The analysis suggests that for promoting currency stability the traditionally debated distinctions between crawling bands and managed floats are likely less important than the political environments in which they are operated.