TY  - JOUR
AU  - Klein,Michael W.
AU  - Marion,Nancy P.
TI  - Explaining the Duration of Exchange-Rate Pegs
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 4651
PY  - 1994
Y2  - February 1994
UR  - http://www.nber.org/papers/w4651
L1  - http://www.nber.org/papers/w4651.pdf
N1  - Author contact info:
Michael W. Klein
Fletcher School
Tufts University
Medford, MA 02155
Tel: (617) 627-2718
Fax: (617) 627-3712
E-Mail: michael.klein@tufts.edu

Nancy Marion
Department of Economics
Dartmouth College
Hanover, NH  03755
E-Mail: Nancy.P.Marion@Dartmouth.EDU
AB  - This paper is a theoretical and empirical investigation into the duration of exchange-rate pegs.  The theoretical model considers a policy-maker who must trade off the economic costs of real exchange- rate misalignment against the political cost of realignment.  The optimal time to spend on a peg is derived and factors that influence peg duration are identified.  The predictions of the model are tested using logit analysis with a data set of exchange-rate pegs for sixteen Latin American countries and Jamaica during the 1957-1991 period.  We find that the real exchange rate is a significant determinant of the likelihood of a devaluation.  Structural variables, such as the openness of the economy and its geographical trade concentration, also significantly affect the likelihood of a devaluation.  Finally, political events that change the political cost of realignment, such as regular and irregular executive transfers, are empirically important determinants of the likelihood of a devaluation.
ER  -