Currency Boards, Expectations and Inflation Persistence

J.A. Carlson

Working Papers from Purdue University, Krannert School of Management - Center for International Business Education and Research (CIBER)

Abstract: Adopting the exchange rate as a nominal anchor for monetary stabilization has proved costly in a number of countries as inflationary inertia produces severe real exchange rate appreciation. What causes inflation persistence? Complementary to existing explanation such as staggered contracts and low credibility, we note that the introduction of a new monetary rule, such as a fixed exchange rate reduces inflationary expectations immediately to the target level only if all agents understand the implications of the rule.

Keywords: EXCHANGE RATE; INFLATION (search for similar items in EconPapers)
JEL-codes: E63 (search for similar items in EconPapers)
Date: 1997

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Persistent link: http://EconPapers.repec.org/RePEc:fth:purkib:97-007

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