ABSTRACT
In this chapter, the authors discuss the reasons why they believe that support for the use of pegged exchange rates as nominal anchors has been excessive. They also discuss the meaning of nominal anchors and consider exchange rate pegs that may be temporary. The authors present some of the practical issues of implementation and review ways in which temporary pegs may have destabilizing rather than stabilizing effects. They describe the problem of establishing the credibility of exchange rate pegs and review the experience of the European Monetary System in this regard. The authors provide a more general discussion of the major factors likely to affect the credibility and desirability of choosing the exchange rate as a long-run nominal anchor. They argue that to a substantial degree these will rest on the same factors as identified in the theory of optimum currency areas as influencing the costs and benefits of fixed versus flexible exchange rates.
