Credibility in fixed exchange rate regimes: Theoretical and historical perspectives

At present, the global monetary regime is based on floating exchange rates among the major advanced countries: the United States, Japan, the United Kingdom, Canada, Australia, and the Eurozone. The Eurozone is a monetary union. The rest of the world has a gamut of regimes, ranging from floating to hard pegs. A key underlying factor behind the current regime is credibility to maintain stable monetary policies.

The origins of credibility in monetary regimes go back to the classical gold standard, 1880–1914. In that regime, in the advanced countries, adherence by the monetary authorities to the rule of convertibility of national currencies in terms of gold provided a credible nominal anchor. Today gold is no longer the nominal anchor; instead this anchor is based on the credibility of independent central banks dedicated to keeping inflation low. Between 1914 and the present, the world exhibited several regimes that gradually did away with gold as the nominal anchor and that had varying success in maintaining credibility. In this book, we present nine studies of how credibility functioned in four monetary regimes, from the gold standard to the present regime of managed floating.