FIXED EXCHANGE-RATES - CREDIBILITY, FLEXIBILITY AND MULTIPLICITY

This paper surveys recent work on the sustainability of fixed exchange rates, It considers a dynamic version the Barro-Gordon framework, in which the level of a state variable (in this case debt) determines the pay-offs available to the government at each point in time. Multiple equilibria and self-fulfilling runs are possible, but only at certain levels of debt. A surprise devaluation can either increase or decrease future expected devaluation relative to a no-devaluation situation.