This paper proposes a new explanation for the greater variability of real exchange rates under pegged than under floating nominal exchange rate systems. The explanation hinges on the propensity of governments to use international trade restrictions and financial restrictions for...

Media reports on foreign exchange rates are filled with discussions of “overvalued” or “undervalued” currencies. Stories in the financial press about changes in exchange rates frequently state that they affect international competitiveness and employment

This paper proposes a new explanation for the greater variability of real exchange rates under pegged than under floating nominal exchange rate systems. The explanation hinges on the propensity of governments to use international trade restrictions and financial restrictions for...