Adopting the exchange rate as a nominal anchor for monetary stabilization has proved costly in a number of countries as inflationary inertia produces severe real exchange rate appreciation. What causes inflation persistence? Complementary to existing explanation such as staggered contracts and low credibility, we note that the introduction of a new monetary rule, such as a fixed exchange rate reduces inflationary expectations immediately to the target level only if all agents understand the implications of the rule.
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Paper provided by Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER) in its series Papers with number
97-007.
Length: 23 pages Date of creation: 1997 Date of revision: Handle: RePEc:fth:purkib:97-007
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Find related papers by JEL classification: E63 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - Comparative or Joint Analysis of Fiscal and Monetary Policy; Stabilization