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Exchange Rates as Nominal Anchors

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  • Sebastian Edwards

Abstract

This paper discusses the use of nominal exchange rates as nominal anchors in stabilization programs. The first part deals with the dynamics of inflation in highly indexed economies. It is shown that credible exchange rate anchors will reduce the degree of inflationary inertia. However, if some residual inertia is maintained in some contracts, real exchange rate overvaluation will result. Data from Chile, Mexico and Yugoslavia are used to test the implications of the model. The second part deals with the long run, and uses a 56 countries data set to investigate whether fixed exchange rates have been associated with greater financial discipline.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 4246.

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Date of creation: Dec 1992
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Publication status: published as Edwards, Sebastian. “Exchange Rates as Nominal Anchors." Weltwirtschaftliches Archiv 129, 1 (1993): 1-32.
Handle: RePEc:nbr:nberwo:4246

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  1. Dornbusch, Rudiger & Fischer, Stanley, 1991. "Moderate inflation," Policy Research Working Paper Series 807, The World Bank.
  2. Pierre-Richard Agénor & Mark P. Taylor, 1991. "Testing for Credibility Effects," IMF Working Papers 91/110, International Monetary Fund.
  3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  4. Robert P. Flood & Peter Isard, 1988. "Monetary Policy Strategies," NBER Working Papers 2770, National Bureau of Economic Research, Inc.
  5. Devarajan, Shantayanan & Rodrik, Dani, 1991. "Do the benefits of fixed exchange rates outweigh their costs? The Franc Zone in Africa," Policy Research Working Paper Series 777, The World Bank.
  6. Peter Montiel & Bijan B. Aghevli & Mohsin S. Khan, 1991. "Exchange Rate Policy in Developing Countries," IMF Occasional Papers 78, International Monetary Fund.
  7. Cukierman, Alex & Webb, Steven B & Neyapti, Bilin, 1992. "Measuring the Independence of Central Banks and Its Effect on Policy Outcomes," World Bank Economic Review, World Bank Group, vol. 6(3), pages 353-98, September.
  8. 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,.
  9. Kiguel, Miguel A & Liviatan, Nissan, 1992. "The Business Cycle Associated.with Exchange Rate-Based Stabilizations," World Bank Economic Review, World Bank Group, vol. 6(2), pages 279-305, May.
  10. Alesina, Alberto & Tabellini, Guido, 1988. "Credibility and politics," European Economic Review, Elsevier, vol. 32(2-3), pages 542-550, March.
  11. Robert P. Flood & Peter Isard, 1989. "Monetary Policy Strategies," IMF Staff Papers, Palgrave Macmillan, vol. 36(3), pages 612-632, September.
  12. Thomas J. Sargent, 1981. "Stopping moderate inflations: the methods of Poincaré and Thatcher," Working Papers 1, Federal Reserve Bank of Minneapolis.
  13. Guillermo Calvo & Carlos A. Végh Gramont, 1990. "Credibility and the Dynamics of Stabilization Policy," IMF Working Papers 90/110, International Monetary Fund.
  14. Devarajan, Shantayanan & Rodrik, Dani, 1991. "Do the Benefits of Exchange Rates Outweigh Their Cost? The Franc Zone in Africa," CEPR Discussion Papers 561, C.E.P.R. Discussion Papers.
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Cited by:
  1. Luis Felipe Lagos, . "Reflexiones en Torno a la Inflación en Chile," Documentos de Trabajo 167, Instituto de Economia. Pontificia Universidad Católica de Chile..
  2. Sebastian Edwards, 1999. "Crisis Prevention: Lessons from Mexico and East Asia," NBER Working Papers 7233, National Bureau of Economic Research, Inc.
  3. Diehl, Markus, 1993. "Stabilization without crisis: The case of Vietnam," Kiel Working Papers 578, Kiel Institute for the World Economy.
  4. Diego Bastourre & Jorge Carrera, 2004. "Could The Exchange Rate Regime Reduce Macroeconomic Volatility?," Anais do XXXII Encontro Nacional de Economia [Proceedings of the 32th Brazilian Economics Meeting] 067, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  5. António Duarte, 2009. "The Portuguese Disinflation Process: Analysis of Some Costs and Benefits," Transition Studies Review, Springer, vol. 16(1), pages 157-173, May.
  6. Guergana Stanoeva, 2004. "Les caisses d’émission des Pays Baltes et de la Bulgarie : la recherche d’une crédibilité renforcée," Revue d'Économie Financière, Programme National Persée, vol. 75(2), pages 85-112.
  7. Coulibaly, Issiaka & Davis, Junior, 2013. "Exchange rate regimes and economic performance: Does CFA zone membership benefit their economies?," MPRA Paper 54075, University Library of Munich, Germany.
  8. Collins, Susan M., 1996. "On becoming more flexible: Exchange rate regimes in Latin America and the Caribbean," Journal of Development Economics, Elsevier, vol. 51(1), pages 117-138, October.
  9. Diego Nicolás Moccero, 2001. "Esquemas Cambiarios y Monetarios Alternativos en un Modelo de Interdependencia Macroeconómica entre Argentina y Brasil," Department of Economics, Working Papers 031, Departamento de Economía, Facultad de Ciencias Económicas, Universidad Nacional de La Plata.

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