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Exchange rate regimes and inflation: only hard pegs make a difference

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  • Michael Bleaney
  • Manuela Francisco

Abstract

Using data from a large sample of developing countries from 1985 to 2001, we confirm that hard pegs (currency boards or a shared currency) reduce inflation and money growth. There is no evidence that soft pegs confer any monetary discipline, after other factors are controlled for. Inflation triggers regime switches. Under hard pegs, monetary growth is unaffected by fiscal deficits or by inflation shocks. Under soft pegs, as under floats, increased fiscal deficits and positive inflation shocks are associated with higher monetary growth. The apparently slower per capita output growth under hard pegs is explained by their geographical distribution.

Suggested Citation

  • 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.
  • Handle: RePEc:cje:issued:v:38:y:2005:i:4:p:1453-1471
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    Citations

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    Cited by:

    1. Michael Bleaney & Mo Tian, 2012. "Currency Networks, Bilateral Exchange Rate Volatility and the Role of the US Dollar," Open Economies Review, Springer, vol. 23(5), pages 785-803, November.
    2. Plümper, Thomas & Neumayer, Eric, 2008. "Exchange rate regime choice with multiple key currencies," LSE Research Online Documents on Economics 25164, London School of Economics and Political Science, LSE Library.
    3. Aaron Jackson & William Miles, 2008. "Fixed Exchange Rates and Disinflation in Emerging Markets: How Large Is the Effect?," Review of World Economics (Weltwirtschaftliches Archiv), Springer;Institut für Weltwirtschaft (Kiel Institute for the World Economy), vol. 144(3), pages 538-557, October.
    4. Mahvash S Qureshi & Atish R. Ghosh & Charalambos G Tsangarides, 2011. "Words vs. Deeds; What Really Matters?," IMF Working Papers 11/112, International Monetary Fund.
    5. S. Rajan, Ramkishen, 2010. "The Evolution and Impact of Asian Exchange Rate Regimes," ADB Economics Working Paper Series 208, Asian Development Bank.
    6. Tavlas, George & Dellas, Harris & Stockman, Alan C., 2008. "The classification and performance of alternative exchange-rate systems," European Economic Review, Elsevier, vol. 52(6), pages 941-963, August.
    7. Miles, William & Vijverberg, Chu-Ping, 2011. "Formal targets, central bank independence and inflation dynamics in the UK: A Markov-Switching approach," Journal of Macroeconomics, Elsevier, vol. 33(4), pages 644-655.
    8. Petreski, Marjan, 2014. "Grooming Classifications: Exchange Rate Regimes and Growth in Transition Economies," MPRA Paper 54473, University Library of Munich, Germany.
    9. Ramkishen S. Rajan, 2011. "Management of Exchange Rate Regimes in Emerging Asia," Macroeconomics Working Papers 23214, East Asian Bureau of Economic Research.
    10. Ghanem Darine, 2012. "Fixed Exchange Rate Regimes and Inflation Performance: Evidence from MENA Countries," Review of Middle East Economics and Finance, De Gruyter, vol. 8(1), pages 1-30, August.
    11. William MILES, 2011. "Financial Globalization And Inflation In Developing Countries: A Reappraisal," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 11(1).
    12. Michael Bleaney, & Manuela Francisco, "undated". "The Performance of Exchange Rate Regimes in Developing Countries - Does the Classifications Scheme Matter?," Discussion Papers 07/04, University of Nottingham, CREDIT.
    13. Michael Bleaney & Manuela Francisco, 2005. "Inflation persistence and exchange rate regimes: evidence from developing countries," Economics Bulletin, AccessEcon, vol. 6(2), pages 1-15.
    14. repec:ove:journl:aid:11272 is not listed on IDEAS

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    JEL classification:

    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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