Working Paper: CEPR ID: DP2829
Authors: Michael Dueker; Andreas M. Fischer
Abstract: This study seeks to determine if there were identifiable contrasts between the Austrian and Thai pegs that would have hinted at problems for Thailand prior to July 1997. The strategy is to first estimate a reaction function of a successful pegging country, i.e. Austria, to help identify salient features that made the Austrian peg credible. Next, the same model is applied to Thailand's monetary policy, an East Asian country that maintained one of the tightest pegs to the US dollar prior to its collapse. One lesson for pegging countries that emerges from the empirical results is that they ought to behave like assiduous inflation targeters even when there is no pressure on the exchange rate. A second lesson is that care is needed in choosing an anchor currency, because the major currencies experience wide swings against one another.
Keywords: currency crisis; exchange rate peg; Thailand
JEL Codes: E52; E58; F31
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Adherence to inflation targeting (E61) | Stabilization of the peg (E63) |
| Austrian peg's success (B53) | Close alignment with German inflation target (E52) |
| Inflation mismanagement (E31) | Collapse of the peg (F31) |
| Choosing the right anchor currency (F31) | Stability of the peg (F31) |
| Inflation differentials (E31) | Destabilization of exchange rate commitments (F31) |
| Stable feedback mechanisms (C62) | Maintenance of a successful peg (E61) |
| Instability in feedback mechanisms (C62) | Currency crises (F31) |