## Words vs. Deeds: What Really Matters?

_IMF Working Papers, May 1, 2011_

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## Bibliographic details
- Authors: Mahvash S Qureshi, Atish R. Ghosh, Charalambos G Tsangarides
- Published: May 1, 2011
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781455261413.001

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### Summary and main finding
- Revisits the link between the nominal exchange rate regime and inflation for 145 emerging market and developing countries (EMDCs) over the period 1980-2010.
- Central hypothesis: a de jure peg without a corresponding de facto peg yields little value; likewise, de facto pegs lacking a corresponding de jure peg reap few of the low inflation benefits associated with pegging the exchange rate.
- Empirical result: pegged exchange rates are associated with significantly lower inflation in EMDCs than flexible exchange rates.
- Magnitude and nuance: the low-inflation effect is much stronger for de facto pegs that are matched by de jure pegs than for de facto pegs that are not matched by de jure pegs.
- Conclusion: both deeds (de facto behavior) and words (de jure declarations) matter for anchoring expectations and delivering low inflation.

### Data and methodology
- Sample: 145 emerging market and developing countries (EMDCs).
- Time period: 1980-2010.
- Novel data use: exploits a dataset containing both de jure and de facto exchange rate regime classifications to test the role of concordance between declared and actual regimes.

### Policy implications and interpretation
- Credible nominal anchors require both a declared (de jure) regime and consistent policy behavior (de facto implementation).
- Policymakers seeking low inflation should ensure that institutional declarations about exchange rate arrangements are backed by observable exchange rate behavior to effectively anchor expectations.
- De jure adherence to a pegged regime without corresponding de facto actions is unlikely to deliver the full inflation benefits of pegging; likewise, de facto pegging without clear de jure commitment is of limited value.

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_Source: https://www.imf.org/en/publications/wp/issues/2016/12/31/words-vs-24847_