Fixed exchange rate credibility with heterogeneous expectations |
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Authors: | John A Carlson Naven Valev |
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Institution: | aDepartment of Economics, Purdue University, West Lafayette, IN 47907, United States;bDepartment of Economics, Georgia State University, Atlanta, GA 30302, United States |
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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. |
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Keywords: | Endogenous inattention Fixed-exchange-rate credibility Heterogeneous expectations Currency boards |
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