Abstract:

In theory, a country with high inflation can reduce the inflation rate by pegging to a low inflation currency. Empirical results have proved that there are more failures than successes in the attempts of reducing inflation by fixing the exchange rate. Krugman's model has aroused great interest among academics. According to Krougman, a fixed exchange rate system is vulnerable to speculative attacks and is likely to cause a bal-ance-of-payment crisis.

Key words: fixed exchange rate system, disinflation, speculative attack, balance-of-payment crisis, exchange rate-based stabilization