Exchange Rate Regimes and Inflation - Only Hard Pegs Make a Difference
University of Nottingham Economics Working Paper No. 03/15
38 Pages Posted: 22 Nov 2003
Date Written: September 2003
Previous research has suggested that pegged exchange rates are associated with lower inflation than floating rates. In which direction does the causality run? Using data from a large sample of developing countries from 1984 to 2000, we confirm that "hard" pegs (currently boards or a shared currency) reduce inflation and money growth. There is no evidence that "soft" pegs confer any monetary discipline. The choice between soft pegs and floats is determined by inflation: when inflation is low, pegs tend to be chosen and sustained, and when inflation is high, either floats are chosen or there are frequent regime switches.
JEL Classification: F41
Suggested Citation: Suggested Citation