Working Paper: CEPR ID: DP390
Authors: George S. Alogoskoufis
Abstract: This paper investigates the relation between the dynamics of inflation and exchange-rate regimes. It demonstrates that fixed exchange-rate regimes such as the international gold standard and the Bretton Woods gold-dollar standard appear to be associated with negligible persistence of inflation in the industrial economies, while regimes of managed exchange rates are associated with very high persistence of inflation: the interwar period is associated with persistent deflation, the more recent period of managed floating with persistent inflation.The paper uses an overlapping contracts model of inflation to propose that the persistence of higher inflation in managed exchangerate regimes is a result of the accommodation of inflationdifferentials by exchange-rate policy. The evidence does not seemto contradict this hypothesis.
Keywords: exchange rate regimes; inflation; monetary accommodation
JEL Codes: 430; 121; 134
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| fixed exchange rate regimes (F33) | lower inflation persistence (E31) |
| managed exchange rate regimes (F33) | higher inflation persistence (E31) |
| exchange rate policy accommodating inflation differentials (F31) | higher inflation persistence (E31) |
| managed exchange rate regimes (F33) | accommodation of inflation differentials (F31) |
| accommodation of inflation differentials (F31) | cost-push influence on domestic inflation (E31) |
| cost-push influence on domestic inflation (E31) | higher inflation persistence (E31) |
| fixed exchange rate regimes (F33) | smaller variance of inflationary shocks (E31) |