The Effectiveness of Monetary Policy Anchors: Firm-Level Evidence
36 Pages Posted: 13 Nov 2009 Last revised: 22 Feb 2013
Date Written: November 1, 2009
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: Suggested Citation