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Does the choice of nominal anchor matter?

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  • David M. Gould
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    Abstract

    The conventional wisdom on nominal anchors is that exchange rate-based inflation stabilizations lead to economic booms while monetary-based stabilizations lead to recessions. This study finds strong evidence against this view. Rather than determining the path of economic growth, the choice of nominal anchor appears to be endogenously determined by the state of the economy. To peg or manage the exchange rate, a high level of international reserves is important, especially when a government's credibility is low after a period of high inflation. After controlling for the level of international reserves and the rate of inflation, growth after monetary-based stabilizations does not significantly differ from that following exchange rate-based stabilizations. ; Economic Research Working Paper 9914

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    Paper provided by Federal Reserve Bank of Dallas in its series Center for Latin America Working Papers with number 0499.

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    Date of creation: 1999
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    Handle: RePEc:fip:feddcl:0499

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    Keywords: Inflation (Finance);

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    1. Reinhart, Carmen & Vegh, Carlos, 1994. "Inflation stabilization in chronic inflation countries: The empirical evidence," MPRA Paper 13689, University Library of Munich, Germany.
    2. Uribe, Martin, 1997. "Exchange-rate-based inflation stabilization: The initial real effects of credible plans," Journal of Monetary Economics, Elsevier, vol. 39(2), pages 197-221, July.
    3. Dornbusch, Rudiger, 1982. "Stabilization policies in developing countries: What have we learned?," World Development, Elsevier, vol. 10(9), pages 701-708, September.
    4. Marianne Baxter & Alan C. Stockman, 1988. "Business Cycles and the Exchange Rate System: Some International Evidence," NBER Working Papers 2689, National Bureau of Economic Research, Inc.
    5. Allan Drazen, 1997. "Policy Signaling in the Open Economy: A Re-Examination," NBER Working Papers 5892, National Bureau of Economic Research, Inc.
    6. Sergio Rebelo & Carlos A. Vegh, 1995. "Real Effects of Exchange Rate-Based Stabilization: An Analysis of Competing Theories," NBER Working Papers 5197, National Bureau of Economic Research, Inc.
    7. Sachs, Jeffrey D, 1996. "Economic Transition and the Exchange-Rate Regime," American Economic Review, American Economic Association, vol. 86(2), pages 147-52, May.
    8. Calvo, Guillermo A, 1986. "Temporary Stabilization: Predetermined Exchange Rates," Journal of Political Economy, University of Chicago Press, vol. 94(6), pages 1319-29, December.
    9. Carlos A. Végh, 1992. "Stopping High Inflation: An Analytical Overview," IMF Staff Papers, Palgrave Macmillan, vol. 39(3), pages 626-695, September.
    10. Rodriguez, Carlos Alfredo, 1982. "The Argentine stabilization plan of December 20th," World Development, Elsevier, vol. 10(9), pages 801-811, September.
    11. Bruno, M., 1991. "High Inflation and the Nominal Anchors of an Open Economy," Princeton Studies in International Economics 183, International Economics Section, Departement of Economics Princeton University,.
    12. Baxter, Marianne & Stockman, Alan C., 1989. "Business cycles and the exchange-rate regime : Some international evidence," Journal of Monetary Economics, Elsevier, vol. 23(3), pages 377-400, May.
    13. Jorge Roldos, 1993. "On Credible Disinflation," IMF Working Papers 93/90, International Monetary Fund.
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    Cited by:
    1. Vítor Castro & Francisco José Veiga, 2002. "Political Business Cycles and Inflation Stabilization," NIPE Working Papers 9/2002, NIPE - Universidade do Minho.

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