In addition, the higher interest rates used to defend the exchange rate may threaten a sharp decline in the economy and a collapse of the banking system. When this happens, currency values and equity prices often plunge below appropriate levels, with resulting adverse consequences to the real economy.
BIS Review 110/1999  10  The conventional wisdom today is that small open economies face a choice of one of the extremes – either a flexible exchange rate regime complemented by a disciplined monetary policy or a very fixed exchange rate regime, characterized by a currency board or by adopting some other country’s currency, as in dollarization.