How Does Learning Affect Inflation After a Shift in the Exchange Rate Regime?

Author/Editor:

Laura Papi

Publication Date:

June 1, 1994

Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper analyzes the consequences of a shift from a floating to a pegged exchange rate regime on the actual and expected inflation rate, in an environment of asymmetric information. Policymaking is endogenous and the public learns rationally. There are two main findings. First, there is a “honeymoon effect” after the regime change, where inflation is lower than in the long run. Second, the asymmetric information outcome converges to that of symmetric information in the long run.

Series:

Working Paper No. 1994/070

Subject:

Exchange rate arrangements Exchange rates Inflation Purchasing power parity Real exchange rates

English

Publication Date:

June 1, 1994

ISBN/ISSN:

9781451960372/1018-5941

Stock No:

WPIEA0701994

Pages:

26

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