Capital market development, corporate governance and the credibility of exchange rate pegs

Arbeitspapier

Focusing on emerging market currency arrangements, we build a model of an exchange rate peg with escape clauses and output persistence. We first show how output persistence works as an additional 'fundamental' so that an exogenous increase in persistence can make the currency peg more vulnerable to speculative attacks. We then endogenise output persistence as arising from capital market frictions that are caused by weak corporate governance institutions. It turns out that in emerging market economies, often characterised by credit constraints, a partial reform of corporate governance institutions may enhance a financial accelerator mechanism, which increases output persistence and deteriorates the credibility of the exchange rate peg. A conservative policymaker partially counters this adverse effect, but only a complete reform of corporate governance institutions fully eliminates persistence and reduces the risk of currency crisis on all levels of policy preferences.

Object Details

• Language: Englisch

References and Relationships

• Bibliographic citation: Series: ECB Working Paper ; No. 34

Classification and Topics

• Classification: Wirtschaft ; Central Banks and Their Policies ; International Monetary Arrangements and Institutions ; Expectations; Speculations ; General Financial Markets: Government Policy and Regulation ; Corporate Finance and Governance: Government Policy and Regulation

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Castrén, Olli ; Takalo, Tuomas
• Event: Veröffentlichung
• (who): European Central Bank (ECB)
• (where): Frankfurt a. M.
• (when): 2000

Further information

• Handle: http://hdl.handle.net/10419/152468
• Last update: 10.03.2025, 11:44 AM CET