Pitt, Alexander

Sustaining Fixed Exchange Rates: a Model with Debt and Institutions

The recent breakdowns of fixed or quasi-fixed exchange rate regimes in Asia, Russia, and Brazil have reconfirmed the important role played by current account deficits and debt in the sustainability of a pegged exchange rate in developing countries. In addition, the crucial importance of sound banking institutions and government policies has been highlighted. Other factors have also played a role, to a different degree in different countries: the government deficit, political considerations, and external circumstances, such as the appreciation of the U.S. dollar, to which the currencies attacked were either fully or partly pegged.