Does the Nominal Exchange Rate Regime Matter?

Abstract

The relevance of the exchange rate regime for macroeconomic performance remains a key issue in international macroeconomics. We use a comprehensive dataset covering nine regime-types for one hundred forty countries over thirty years to examine the link between the regime, inflation, and growth. Two sturdy stylized facts emerge. First, inflation is both lower and more stable under pegged regimes, reflecting both slower money supply and faster money demand growth. Second, real volatility is higher under pegged regimes. In contrast, growth varies only slightly across regimes, though investment is somewhat higher and trade growth somewhat lower under pegged regimes. Pegged regimes are thus characterized by lower inflation but more pronounced output volatility.