Fractional Reserves and Exchange Rate Pegging: Currency, Banking and Inflation Crises
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| Year of publication | 2008 |
| Type | Appeared in Conference without Proceedings |
| MU Faculty or unit | |
| Citation | |
| Description | Fractional reserves give the currency systems an additional flexibility while pegged exchange rates introduce elements of stability to the systems. Both of these features being desirable, they are competing by their very nature. If accompanied by excessive flexibility, the pegging may provide only temporary stability, interrupted by occasional dramatic episodes of severe accommodations in the form of banking, currency or inflation crises. Arguably, the most important single common cause behind these episodes is to be found in the deliberate illiquidity on the part of banks who combine currency issue based on fractional reserves with the exchange rate pegging. |