Many countries fix their exchange rate in order to bring financial stability. Usually, inflation declines and output expands but contractual agreements retain their short time frame, investment is sluggish, and economic growth slows down a few years later. This outcome is often attributed to...

This paper examines whether rational, fully informed speculators will smooth exchange rates. Friedman's (1953) claim that they must do so is challenged, based on the exclusion of interest rate differentials from his interpretation of speculator behavior. Once one recognizes that interest rates...

After disinflation has been achieved, agents who form more sophisticated forecasts have lower confidence in the sustainability of a peg compared to less sophisticated agents. Furthermore, sustained financial stability leads to a declining proportion of sophisticated agents. Thus, the credibility...