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Words vs. Deeds; What Really Matters?

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

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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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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  1. Jonathan David Ostry & Anne Marie Gulde & Atish R. Ghosh & Holger C. Wolf, 1995. "Does the Nominal Exchange Rate Regime Matter?," IMF Working Papers 95/121, International Monetary Fund.
  2. Romer, David, 1993. "Openness and Inflation: Theory and Evidence," The Quarterly Journal of Economics, MIT Press, vol. 108(4), pages 869-903, November.
  3. 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.
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