Expecting an appreciation of the Chinese currency seems to be a safe bet. There is a mounting pressure from U.S. representatives, and a majority of economists seem to believe that the Chinese economy is overheating and that the dollar peg should be loosened as soon as possible. Indeed, a nominal...

Two macroeconomic constraints determine the credibility of an exchange rate system: the availability of foreign exchange and the sustainability of fiscal balance. The following paper analyses the relative importance of these constraints for fixed and flexible exchange rate systems, examines the...