Words vs. Deeds : What Really Matters?

Author/Editor:

Mahvash S Qureshi ; Atish R. Ghosh ; Charalambos G Tsangarides

Publication Date:

May 1, 2011

Electronic Access:

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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 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.

Series:

Working Paper No. 11/112

Subject:

English

Publication Date:

May 1, 2011

ISBN/ISSN:

9781455261413/1018-5941

Stock No:

WPIEA2011112

Format:

Paper

Pages:

35

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