DP2829 | The Mechanics of a Successful Exchange-Rate Peg: Lessons for emerging Markets

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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.