{ "title": "Sustaining Fixed Exchange Rates: A Model with Debt and Institutions", "publication": "IMF Working Papers, March 1, 2001", "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011", "canonical": "https://www.imf.org/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011", "overlayPath": "/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011/index.md", "summary": "Fixed exchange rate regimes have come into disrepute, as their defense has become all but impossible. Yet, while a determined attack on a currency cannot be prevented or, ultimately, withstood, policies can reduce the vulnerability of a country to such attacks.", "sections": [ { "heading": "Summary", "content": "- Fixed exchange rate regimes have come into disrepute, as their defense has become all but impossible.\n- While a determined attack on a currency cannot be prevented or, ultimately, withstood, policies can reduce the vulnerability of a country to such attacks.\n- The paper develops an analytical framework of costs and benefits of a fixed exchange rate, based on the ability of a developing country to meet its external obligations while achieving a maximum rate of long-term output growth.\n- The focus is on how structural policies and institutions influence the degree of dependence of a country on a fixed exchange rate regime." }, { "heading": "Major themes and analytical focus", "content": "- Costs and benefits of maintaining a fixed exchange rate.\n- Interaction of debt dynamics with exchange rate regime sustainability (debt accumulation, debt service, debt structure, debt-service cost).\n- Role of structural policies and institutions (competition policy, financial supervision, economic system) in reducing dependence on a fixed exchange rate.\n- Influence of external factors and rates (world interest rate, risk premium) on exchange rate vulnerability.\n- Linkages to financial sector features, foreign direct investment, capital account openness, and exchange rate volatility." }, { "heading": "Key findings and concepts highlighted", "content": "- Abandonment cost and costs of abandoning a fixed exchange rate are central determinants of regime sustainability.\n- Currency attacks can be mitigated in vulnerability by policy choices even if ultimately unstoppable when determined.\n- Productivity and return on investment considerations matter for long-term growth under a fixed exchange rate.\n- Interest rate cost and risk premium affect the attractiveness and feasibility of defending a fixed exchange rate.\n- Exchange rate target and exchange rate volatility vis-à-vis currency are important for balance of payments and national accounts outcomes." }, { "heading": "Policy implications and recommendations (as emphasized by the paper)", "content": "- Strengthen structural policies and institutions to reduce dependence on a fixed exchange rate regime.\n- Improve financial supervision and the financial sector to lower vulnerability to external shocks.\n- Adopt policies that manage debt accumulation and debt-service costs to enhance the ability to meet external obligations.\n- Encourage conditions that support foreign direct investment and higher productivity to sustain long-term growth without excessive reliance on a fixed exchange rate.\n\n---\n\n Content in this bundle\n\n- Sustaining Fixed Exchange Rates: A Model with Debt and Institutions - WP/01/27\n - Sustaining Fixed Exchange Rates: A Model with Debt and Institutions - WP/01/27 (Markdown version){rel=\"alternate\" type=\"text/markdown\"}\n - Sustaining Fixed Exchange Rates: A Model with Debt and Institutions - WP/01/27 (PDF){rel=\"external\" type=\"application/pdf\"}\n\n---\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011" } ], "bullets": [ "[Markdown version](/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011/index.md)", "[Structured JSON version](/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011/index.json)", "[Bundle manifest](/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011/bundle-manifest.json)", "Authors: Alexander Pitt", "Published: March 1, 2001", "Series: IMF Working Papers", "DOI: https://doi.org/10.5089/9781451844528.001", "Fixed exchange rate regimes have come into disrepute, as their defense has become all but impossible.", "While a determined attack on a currency cannot be prevented or, ultimately, withstood, policies can reduce the vulnerability of a country to such attacks.", "The paper develops an analytical framework of costs and benefits of a fixed exchange rate, based on the ability of a developing country to meet its external obligations while achieving a maximum rate of long-term output growth.", "The focus is on how structural policies and institutions influence the degree of dependence of a country on a fixed exchange rate regime.", "Costs and benefits of maintaining a fixed exchange rate.", "Interaction of debt dynamics with exchange rate regime sustainability (debt accumulation, debt service, debt structure, debt-service cost).", "Role of structural policies and institutions (competition policy, financial supervision, economic system) in reducing dependence on a fixed exchange rate.", "Influence of external factors and rates (world interest rate, risk premium) on exchange rate vulnerability.", "Linkages to financial sector features, foreign direct investment, capital account openness, and exchange rate volatility.", "Abandonment cost and costs of abandoning a fixed exchange rate are central determinants of regime sustainability.", "Currency attacks can be mitigated in vulnerability by policy choices even if ultimately unstoppable when determined.", "Productivity and return on investment considerations matter for long-term growth under a fixed exchange rate.", "Interest rate cost and risk premium affect the attractiveness and feasibility of defending a fixed exchange rate.", "Exchange rate target and exchange rate volatility vis-à-vis currency are important for balance of payments and national accounts outcomes.", "Strengthen structural policies and institutions to reduce dependence on a fixed exchange rate regime.", "Improve financial supervision and the financial sector to lower vulnerability to external shocks.", "Adopt policies that manage debt accumulation and debt-service costs to enhance the ability to meet external obligations.", "Encourage conditions that support foreign direct investment and higher productivity to sustain long-term growth without excessive reliance on a fixed exchange rate.", "**Sustaining Fixed Exchange Rates: A Model with Debt and Institutions - WP/01/27**" ], "related": [ { "title": "Sustaining Fixed Exchange Rates: A Model with Debt and Institutions - WP/01/27", "role": "document", "sourceUrl": "https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2001/_wp0127.pdf", "summary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2001/_wp0127.pdf.md", "mime": "text/markdown" }, "binary": { "path": "/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/wp/2001/_wp0127.pdf", "mime": "application/pdf" } } ], "alternates": { "markdown": "/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011/index.md", "json": "/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011/index.json", "bundleManifest": "/en/publications/wp/issues/2016/12/30/sustaining-fixed-exchange-rates-a-model-with-debt-and-institutions-4011/bundle-manifest.json" }, "generatedAtUtc": "2026-09-17T07:36:24.494Z" }