{
  "title": "Multiple Exchange Rates, Fiscal Deficits and Inflation Dynamics",
  "publication": "IMF Working Papers, May 1, 1996",
  "sourceUrl": "https://www.imf.org/en/publications/wp/issues/2016/12/30/multiple-exchange-rates-fiscal-deficits-and-inflation-dynamics-2031",
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  "summary": "The paper explores the inflationary implications of exchange rate regime reforms in a small open economy model combining the public finance view of inflation with multiple exchange markets.",
  "sections": [
    {
      "heading": "Summary",
      "content": "- The paper explores the inflationary implications of exchange rate regime reforms in a small open economy model combining the public finance view of inflation with multiple exchange markets.\n- The analysis focuses on transitions to multiple official exchange markets to account for the experience of many developing countries.\n- Multiple exchange rates were often announced as temporary in those countries.\n- The paper shows that the dynamic response of inflation to the reform markedly differ whether the announcement is credible or not.\n- The paper also compares the response of inflation under a fixed crawl of nominal official rates and under the presence of policy rules aimed at reducing the spread between the official and parallel exchange rates."
    },
    {
      "heading": "Model and scope",
      "content": "- Small open economy model combining:\n  - public finance view of inflation\n  - multiple exchange markets\n- Focus on transitions to multiple official exchange markets, motivated by experiences in many developing countries.\n- Consideration of announcement credibility (credible vs. non-credible temporary announcements).\n- Comparative analysis of:\n  - fixed crawl of nominal official rates\n  - policy rules aimed at reducing the spread between official and parallel exchange rates"
    },
    {
      "heading": "Key findings",
      "content": "- The dynamic response of inflation to the introduction of multiple exchange markets depends critically on whether the temporary nature of the reform is credible.\n- Credibility of the announcement leads to markedly different inflation dynamics than non-credible announcements.\n- Policy rules that aim to reduce the spread between official and parallel exchange rates alter the inflationary response compared with a fixed crawl of nominal official rates."
    },
    {
      "heading": "Policy implications and scenarios analyzed",
      "content": "- Credibility of reform announcements is a central determinant of inflationary outcomes following transitions to multiple official exchange markets.\n- Two policy scenarios compared:\n  - Fixed crawl of nominal official rates\n  - Policy rules targeting reduction of the spread between official and parallel exchange rates\n- Implication: choice of exchange rate adjustment mechanism and credibility management are important for inflation dynamics in economies adopting multiple official exchange markets.\n\n---\n\n\nSource: https://www.imf.org/en/publications/wp/issues/2016/12/30/multiple-exchange-rates-fiscal-deficits-and-inflation-dynamics-2031"
    }
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    "Authors: Vincent Bodart",
    "Published: May 1, 1996",
    "Series: IMF Working Papers",
    "DOI: https://doi.org/10.5089/9781451968378.001",
    "The paper explores the inflationary implications of exchange rate regime reforms in a small open economy model combining the public finance view of inflation with multiple exchange markets.",
    "The analysis focuses on transitions to multiple official exchange markets to account for the experience of many developing countries.",
    "Multiple exchange rates were often announced as temporary in those countries.",
    "The paper shows that the dynamic response of inflation to the reform markedly differ whether the announcement is credible or not.",
    "The paper also compares the response of inflation under a fixed crawl of nominal official rates and under the presence of policy rules aimed at reducing the spread between the official and parallel exchange rates.",
    "Small open economy model combining:",
    "Focus on transitions to multiple official exchange markets, motivated by experiences in many developing countries.",
    "Consideration of announcement credibility (credible vs. non-credible temporary announcements).",
    "Comparative analysis of:",
    "The dynamic response of inflation to the introduction of multiple exchange markets depends critically on whether the temporary nature of the reform is credible.",
    "Credibility of the announcement leads to markedly different inflation dynamics than non-credible announcements.",
    "Policy rules that aim to reduce the spread between official and parallel exchange rates alter the inflationary response compared with a fixed crawl of nominal official rates.",
    "Credibility of reform announcements is a central determinant of inflationary outcomes following transitions to multiple official exchange markets.",
    "Two policy scenarios compared:",
    "Implication: choice of exchange rate adjustment mechanism and credibility management are important for inflation dynamics in economies adopting multiple official exchange markets."
  ],
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