Dynamics of the Exchange Rate in Anticipation of Pegging

This paper studies an economy where agents expect the floating-rate regime to be interrupted on a specific future date by a transitional fixed-rate policy. When the new peg is not revealed in advance, the path of the floating rate in anticipation of pegging is determined by the interaction between what agents perceive to be the objectives and the constraints of the central bank. The paper highlights the role of the pegging date, the duration of the fixed-rate interval, the reserves available to authorities, and the nature of policies implemented after pegging is terminated.