Exchange-Rate Regimes and Inflation: An Empirical Evaluation
Working Papers in International Economics and Finance 2014-02
18 Pages Posted: 24 Feb 2014
Date Written: February 6, 2014
Based on a dataset of 123 economies, both developed and developing countries, this paper investigates the relation between exchange-rate regimes and consumer price index (CPI) inflation performance. Our results suggest that those countries with flexible exchange-rate regimes are characterized by higher CPI inflation rates, while the smaller CPI inflation rates are associated with fixed exchange rates and countries with intermediate regimes occupy an intermediate position in their records of CPI inflation rates. These findings are maintained when we analyze the countries using the World Bank’s classification of income level (low income, lower middle income, upper middle income and high income), except for the case of upper income countries, where we do not find significant differences between fixed and intermediate regimes in CPI inflation performance. Our results suggest that the highest CPI inflation rates are associated with lower middle income countries with flexible exchange rates, while the lowest CPI inflation rates are present in high income countries with fixed exchange rate regimes.
Keywords: Exchange rate regime, CPI inflation rate
JEL Classification: E42, F31
Suggested Citation: Suggested Citation