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Words vs. Deeds; What Really Matters?

Author

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  • Mahvash S 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.

Suggested Citation

  • Mahvash S Qureshi & Atish R. Ghosh & Charalambos G Tsangarides, 2011. "Words vs. Deeds; What Really Matters?," IMF Working Papers 11/112, International Monetary Fund.
  • Handle: RePEc:imf:imfwpa:11/112
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    References listed on IDEAS

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    1. 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.
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    19. repec:hrv:faseco:34721963 is not listed on IDEAS
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    Cited by:

    1. Cruz-Rodríguez, Alexis, 2016. "An empirical assessment of exchange arrangements and inflation performance," MPRA Paper 73005, University Library of Munich, Germany.
    2. Forbes, Kristin & Fratzscher, Marcel & Straub, Roland, 2015. "Capital-flow management measures: What are they good for?," Journal of International Economics, Elsevier, vol. 96(S1), pages 76-97.
    3. Lahura, Erick & Vega, Marco, 2013. "Regímenes cambiarios y desempeño macroeconómico: Una evaluación de la literatura," Revista Estudios Económicos, Banco Central de Reserva del Perú, issue 26, pages 101-119.
    4. repec:pal:imfecr:v:65:y:2017:i:2:d:10.1057_s41308-016-0003-3 is not listed on IDEAS
    5. repec:dug:actaec:y:2017:i:6:p:253-266 is not listed on IDEAS
    6. Atish R. Ghosh & Jonathan D. Ostry & Charalambos G. Tsangarides, 2017. "Shifting Motives: Explaining the Buildup in Official Reserves in Emerging Markets Since the 1980s," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 65(2), pages 308-364, June.
    7. Janet Gale Stotsky & Manuk Ghazanchyan & Olumuyiwa S Adedeji & Nils Øyvind Mæhle, 2012. "The Relationship Between the Foreign Exchange Regime and Macroeconomic Performance in Eastern Africa," IMF Working Papers 12/148, International Monetary Fund.

    More about this item

    Keywords

    Exchange rate regimes; Monetary policy; Inflation; policy credibility; exchange rate; exchange rate regime; central bank; inflation performance; Open Economy Macroeconomics;

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