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Words vs. Deeds

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Author Info

  • Mahvash Saeed Qureshi
  • Atish R. Ghosh
  • Charalambos G. Tsangarides

Abstract

This paper revisits the link between the nominal exchange rate regime and inflation, based on a sample of 145 emerging market and developing countries (EMDCs) over the period 1980-2010. We contend that, just as a de jure peg that is not backed by a de facto peg will have little value, de facto pegs that lack the corresponding de jure will likewise reap few of the low inflation benefits associated with pegging the exchange rate. To test our hypothesis, we exploit a novel dataset of both de jure and de facto exchange rate regime classifications. We find that pegged exchange rates are associated with significantly lower inflation in EMDCs than flexible exchange rates, and that this effect is much stronger for de facto pegs that are matched by de jure pegs than for those that are not. When it comes to anchoring expectations and delivering low inflation, therefore, both deeds and words matter.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 11/112.

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Length: 35
Date of creation: 01 May 2011
Date of revision:
Handle: RePEc:imf:imfwpa:11/112

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Related research

Keywords: Exchange rate regimes; Currency pegs; Developing countries; Economic models; Emerging markets; Floating exchange rates; inflation; exchange rate; money growth; exchange rate regime; lower inflation; inflation performance; monetary policy; floating exchange rate; exchange rates; floating exchange rate regimes; nominal exchange rate; foreign exchange; terms of trade; low inflation; price inflation; inflation rate; exchange rate regime classifications; inflation rates; inflationary expectations; intermediate exchange rate; currency boards; intermediate exchange rate regime; classification of exchange rate; foreign exchange reserves; price stability; inflationary pressures; money supply; exchange reserves; exchange rate regime classification; floating exchange rate regime; exchange rate arrangements; flexible exchange rates; monetary economics; flexible exchange rate; de facto exchange rate regime; currency unions; average inflation; foreign exchange market; exchange rate depreciation; nominal exchange rate depreciation; terms of trade shocks; high inflation; price level; market exchange rates; inflation dynamics; exchange rate volatility; inflation observations; inflation target; effect of inflation; exchange rate fluctuations; real output; actual inflation; lower inflationary expectations; current account balance; exchange rate stability; inflation growth; intermediate exchange rate regimes; exchange arrangements; fixed exchange rates; history of exchange rate; aggregate demand; exchange rate classifications; reduction in inflation; foreign currency; flexible exchange rate regimes; exchange rate flexibility; currency devaluation;

This paper has been announced in the following NEP Reports:

References

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  1. Alberto Alesina & Alexander Wagner, 2003. "Choosing (And Reneging On) Exchange Rate Regimes," Harvard Institute of Economic Research Working Papers 2008, Harvard - Institute of Economic Research.
  2. Jeffrey A. Frankel, 2005. "Contractionary Currency Crashes in Developing Countries," NBER Working Papers 11508, National Bureau of Economic Research, Inc.
  3. Robin Brooks & Kenneth Rogoff & Ashoka Mody & Nienke Oomes & Aasim M. Husain, 2004. "Evolution and Performance of Exchange Rate Regimes," IMF Occasional Papers 229, International Monetary Fund.
  4. Barro, Robert J & Gordon, David B, 1983. "A Positive Theory of Monetary Policy in a Natural Rate Model," Journal of Political Economy, University of Chicago Press, vol. 91(4), pages 589-610, August.
  5. Guisinger, Alexandra & Singer, David Andrew, 2010. "Exchange Rate Proclamations and Inflation-Fighting Credibility," International Organization, Cambridge University Press, vol. 64(02), pages 313-337, April.
  6. Atish R. Ghosh & Anne-Marie Gulde & Jonathan D. Ostry & Holger C. Wolf, 1997. "Does The Nominal Exchange Rate Regime Matter?," Working Papers 97-09, New York University, Leonard N. Stern School of Business, Department of Economics.
  7. VJeffrey A. Frankel, 2005. "Mundell-Fleming Lecture: Contractionary Currency Crashes in Developing Countries," IMF Staff Papers, Palgrave Macmillan, vol. 52(2), pages 149-192, September.
  8. Guillermo A. Calvo & Carmen M. Reinhart, 2000. "Fear of Floating," NBER Working Papers 7993, National Bureau of Economic Research, Inc.
  9. Jay C. Shambaugh, 2004. "The Effect of Fixed Exchange Rates on Monetary Policy," The Quarterly Journal of Economics, MIT Press, vol. 119(1), pages 300-351, February.
  10. Reinhart, Carmen & Rogoff, Kenneth, 2004. "The modern history of exchange rate arrangements: A reinterpretation," MPRA Paper 14070, University Library of Munich, Germany.
  11. Barro, Robert J. & Gordon, David B., 1983. "Rules, discretion and reputation in a model of monetary policy," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 101-121.
  12. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November.
  13. Hans Genberg & Alexander K. Swoboda, 2004. "Exchange-Rate Regimes: "Does What Countries Say Matter?"," IHEID Working Papers 07-2004, Economics Section, The Graduate Institute of International Studies.
  14. Atish R. Ghosh & Jonathan David Ostry & Charalambos G. Tsangarides, 2011. "Exchange Rate Regimes and the Stability of the International Monetary System," IMF Occasional Papers 270, International Monetary Fund.
  15. 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.
  16. Taylor, John B., 1983. "`Rules, discretion and reputation in a model of monetary policy' by Robert J. Barro and David B. Gordon," Journal of Monetary Economics, Elsevier, vol. 12(1), pages 123-125.
  17. Michael Bleaney & Manuela Francisco, 2005. "Exchange rate regimes and inflation: only hard pegs make a difference," Canadian Journal of Economics, Canadian Economics Association, vol. 38(4), pages 1453-1471, November.
  18. Battilossi, Stefano, 2003. "Exchange Rate Regimes: Choices and Consequences. By Atish R. Ghosh, Anne-Marie Gulde, and Holger C. Wolf. Cambridge, MA, and London: The MIT Press, 2002. Pp. 232. $32.95," The Journal of Economic History, Cambridge University Press, vol. 63(04), pages 1177-1178, December.
  19. Stanley Fischer, 2001. "Exchange Rate Regimes: Is the Bipolar View Correct?," Journal of Economic Perspectives, American Economic Association, vol. 15(2), pages 3-24, Spring.
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Citations

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Cited by:
  1. Erick Lahura & Marco Vega, 2013. "Regímenes cambiarios y desempeño macroeconómico: una evaluación de la literatura," Documentos de Trabajo 2013-361, Departamento de Economía - Pontificia Universidad Católica del Perú.
  2. International Monetary Fund, 2012. "The Relationship Between the Foreign Exchange Regime and Macroeconomic Performance in Eastern Africa," IMF Working Papers 12/148, International Monetary Fund.

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