The Operation and Collapse of Fixed Exchange Rate Regimes

Peter M. Garber, Lars E.O. Svensson

NBER Working Paper No. 4971
Issued in December 1994
NBER Program(s):   IFM

The paper reviews the recent literature on exchange rate target zones and on speculative attacks on fixed exchange rates. The influential Krugman model of exchange rate target zones has two main results, namely that credible target zones stabilize exchange rates more than fundamentals (the `honeymoon effect') and that exchange rates depend on fundamentals according to a nonlinear `S-curve' with `smooth pasting.' Almost all the model's empirical implications have been overwhelmingly rejected. Later research has reconciled the theory with empirical results by allowing for imperfectly credible exchange rates and for intra-marginal central bank interventions. That research has also shown that non-linearities and smooth pasting are probably empirically insignificant and that a linear managed-float model is a good approximation to exchange rate target zones. The speculative attack literature has developed models built on the principles of no anticipated price discontinuities, endogenous timing of the speculative attack, and the attack occurring when a finite amount of foreign exchange reserves remain. These models have been extended to include random timing of attacks and alternative post attack regimes. Some empirical tests have been undertaken. In contrast to target zone models, speculative attack models have been influenced by empirical results only to a small extent.

download in pdf format
   (757 K)

email paper

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w4971


  • Garber, Peter M. & Svensson, Lars E.O., 1995. "The operation and collapse of fixed exchange rate regimes," Handbook of International Economics, in: G. M. Grossman & K. Rogoff (ed.), Handbook of International Economics, edition 1, volume 3, chapter 36, pages 1865-1911 Elsevier.
  • Handbook of International Economics, G. Grossman and K. Rogoff, eds. Vol. III, North Holland, Amsterdam,(1995) pp. 1865-1911.

Users who downloaded this paper also downloaded these:
Obstfeld and Rogoff w5191 The Mirage of Fixed Exchange Rates
Garber The Collapse of the Bretton Woods Fixed Exchange Rate System
McCallum w6016 Issues in the Design of Monetary Policy Rules
Marimon and Zilibotti w6038 Unemployment vs. Mismatch of Talents: Reconsidering Unemployment Benefits
Edwards w5756 The Determinants of the Choice between Fixed and Flexible Exchange-Rate Regimes
NBER Videos

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email:

Contact Us