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The Effectiveness of Monetary Policy Anchors: Firm-Level Evidence

36 Pages Posted: 13 Nov 2009 Last revised: 22 Feb 2013

J. Lawrence Broz

University of California, San Diego (UCSD) - Department of Political Science

Michael Plouffe

School of Public Policy, University College London

Date Written: November 1, 2009

Abstract

Analysis of monetary policy posit that exchange-rate pegs, inflation targets, and central bank independence can help anchor private-sector inflation expectations. Yet there are few direct tests of this argument. We offer cross-national, micro-level evidence on the effectiveness of monetary anchors in controlling private-sector inflation concerns. Using firm-level data from 81 countries (~10,000 firms), we find evidence that "international" anchors (exchange-rate commitments) correlate significantly with a substantial reduction in private-sector concerns about inflation while "domestic" anchors (inflation targeting and central bank independence) do not. Our conjecture is that private sector inflation expectations are more responsive to exchange-rate anchors because they are more transparent, more constraining, and more costly than domestic anchoring arrangements.

Keywords: inflation, inflation expectations, central banks, exchange rate regimes, inflation targets

JEL Classification: E3, E31, E5

Suggested Citation

Broz, J. Lawrence and Plouffe, Michael, The Effectiveness of Monetary Policy Anchors: Firm-Level Evidence (November 1, 2009). International Organization 64, 4 (Fall 2010): 695–717.. Available at SSRN: https://ssrn.com/abstract=1337746

J. Lawrence Broz (Contact Author)

University of California, San Diego (UCSD) - Department of Political Science ( email )

9500 Gilman Drive
Code 0521
La Jolla, CA 92093-0521
United States

HOME PAGE: http://weber.ucsd.edu/~jlbroz/

Michael Plouffe

School of Public Policy, University College London ( email )

29/30 Tavistock Square
London, WC1H 9QU
United Kingdom

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