Working Paper: CEPR ID: DP503
Authors: George S. Alogoskoufis
Abstract: This paper investigates the relation between the dynamics of inflation and international monetary and exchange rate regimes in the industrial economies. It demonstrates that fixed exchange rate regimes like the international gold standard and the Bretton Woods gold dollar standard appear to be associated with negligible persistence of inflation, while regimes of managed exchange rates are associated with very high persistence of inflation. The interwar period is associated with persistent deflation, and the more recent period of managed floating is associated with persistent inflation. The paper uses an overlapping contracts model to propose that the higher persistence of inflation is the result of a higher monetary and exchange rate accommodation of price changes in flexible exchange rate regimes. The evidence does not seem to contradict this hypothesis. The results highlight the importance of the effects of monetary regimes on expectations and the behaviour of wage- and price-setters.
Keywords: exchange rate regimes; monetary accommodation; rational expectations
JEL Codes: 430; 121134
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) | negligible inflation persistence (E31) |
| managed exchange rate regimes (F33) | high inflation persistence (E31) |
| monetary accommodation (E52) | inflation persistence (E31) |
| fixed exchange rate regimes (F33) | lack of monetary accommodation (E49) |
| lack of monetary accommodation (E49) | wage and price setters' expectations (E64) |
| higher monetary accommodation (E49) | wage-price spiral (E64) |