Even when economic fundamentals are consistent with the official exchange rate regime, a widespread perception that policymakers face internal costs that are too high to maintain the regime can lead to a crisis.

Question

Quizplus · Accepted Answer

This is true as external factors alone are not the only determinant of exchange rate stability, but internal political and economic considerations also play a crucial role in maintaining a fixed or pegged exchange rate regime. If the public perceives that policymakers are facing internal pressures that make it difficult or costly to maintain the regime, it can erode confidence and lead to a crisis.

Even When Economic Fundamentals Are Consistent with the Official Exchange