Do Exchange Rate Regimes Matter For Inflation And Exchange Rate Dynamics? The Case Of Central America
AbstractThis paper makes an empirical contribution to the discussion on the optimal exchange rate regime. Using as astudy case the experience of the Central American countries, we compare the dynamics of the Real Exchange Rate (RER) and inflation persistence between dollarized economies and countries with some degree of exchange rate flexibility. Our results show that the two dollarized countries in the region, El Salvador and Panama, are quite different in terms of RER and inflation dynamics. While in El Salvador the RER spends more time away from the equilibrium level than the non-dollarized countries in the region, the opposite is true for Panama. We also find that inflation persistence in El Salvador is similar to that of the other countries, but smaller in Panama. This leads us to the conclusion that some degree of exchange rate flexibility helps countries to have a RER more aligned with its fundamentals. Nevertheless, a long-lived, highly credible dollarized economy, like Panama, can reduce inflation persistence to such an extent that RER misalignments are actually less frequent than in countries with more flexible exchange rate regimes.
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Bibliographic InfoPaper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 517.
Date of creation: Jun 2009
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- Sengül Dagdeviren & Ayla Ogu? Binatli & Niloufer Sohrabji, 2012.
"Misalignment Under Different Exchange Rate Regimes: the Case of Turkey,"
CEPII research center, issue 130, pages 81-98.
- Dağdeviren, Sengül & Ogus Binatli, Ayla & Sohrabji, Niloufer, 2011. "Misalignment under different exchange rate regimes: the case of Turkey," MPRA Paper 46774, University Library of Munich, Germany.
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