Working Paper: CEPR ID: DP2478
Authors: Michael Dueker; Andreas M. Fischer
Abstract: One test of an exchange-rate peg is to ask whether the implicit inflation target of the pegging country is the same as that of the anchor country. If the inflation targets of the two countries are different, the peg's long-run credibility should be rejected. We examine the Austrian experience with a 'hard currency' policy aimed at targeting its exchange rate with the German mark. We find that when our feedback rule called for an increase in Austrian interest rates, the actual increases tended to exceed the implied increases, bolstering market confidence in the responsiveness of Austria's monetary policy.
Keywords: Monetary Policy; Inflation Targeting; Interest Rate Policy Instrument
JEL Codes: E52; E58
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Austria's implicit inflation target (E31) | market confidence in Austrian monetary policy (E58) |
| increase in Austrian short-term interest rates (E49) | actual increases in interest rates (E43) |
| interest rate adjustments (E43) | inflation and exchange rate gaps (F31) |
| similar inflation targets (E31) | credibility of the peg (E51) |
| feedback from nominal target variables (C52) | credibility of the peg (E51) |