Argentina's 1991-2001 Currency Board: An Experiment in Fixing the Exchange Rate

Market-Driven Interest Rate Gaps under a Non-Credible Fixed Exchange Rate

Currency Peg Under Pressure

A country maintains a fixed exchange rate, pegging its currency, the 'Lira', to a foreign currency, the 'Dollar'. Initially, the peg is viewed as stable. However, after a period of economic difficulty, financial market participants begin to widely anticipate that the government will be forced to devalue the Lira in the near future. Based on this change in market expectations alone, what is the most likely immediate outcome in the financial markets?

The Mechanics of a Speculative Attack

Interest Rates and Exchange Rate Credibility

In a fixed exchange rate system, a 'loss of credibility' primarily stems from an official announcement by the central bank that it plans to abandon the currency peg.

A country with a fixed exchange rate begins to experience significant economic challenges, leading financial markets to doubt the government's commitment to maintaining the currency peg. Arrange the following events into the logical sequence that typically unfolds as this loss of credibility intensifies.

A country with a fixed exchange rate is experiencing a period of economic difficulty. Which of the following developments would be the most direct and powerful indicator that financial markets specifically expect the currency peg to be abandoned in the future?

Foundations of a Currency Crisis

Evaluating Policy Responses to a Currency Credibility Crisis

Match each economic event or condition with its most likely consequence or role in a scenario where a fixed exchange rate is losing credibility.