iceland is an example of a country that uses fixed exchange rate.
iceland is an example of a country that uses fixed exchange rate.
examples of countries that uses fixed exchange rate?
iceland
Na
Na
instead of blindly adhering to fixed exchange rate until running out of its foreign reserve, in the self-fulfilling model the government will abandon pegged exchange rate when it is optimal. the possible benefits from maintaining a fixed exchange rate include the following: facilitating international trade and international investment, using fixed exchange rate as nominal anchor to prevent inflation, gaining good reputation of policy consistency. meanwhile, the government usually needs to raise the domestic short-term interest rate to prevent speculative attacks, and the associated cost from raising interest rate includes higher deficit pressure, harming financial stability and higher unemployment rate and economic recession consequently. therefore, conflicts arise between the government's incentives, or between internal balance and external balance. if people believe that the currency will depreciate in the future, by uncovered interest parity, the short-term interest rate will rise as a result, which makes defending fixed exchange rate more costly. when the cost is sufficiently high, fixed exchange rate is abandoned and currency crisis happens.
self-fulfilling crisis