The Reserve Discipline

Jaleel Ahmad
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Jaleel Ahmad: Concordia University

Chapter 6 in Floating Exchange Rates and World Inflation, 1984, pp 131-142 from Palgrave Macmillan

Abstract: Abstract In considering the inflationary propensity of flexible exchange rates, the relatively newer arguments based on price asymmetries and ratchet effects have dwarfed the traditional arguments based on the absence of discipline emanating from the necessity to defend a given exchange rate. Recently, there has been a revival of interest in the discipline argument, both in academic and central banking circles. The implications of reserve discipline for flexible exchange rates have been examined in a number of studies (Phaup, 1974; Spitaeller, 1975; Claassen, 1976; Corden, 1976, 1977; Crockett and Goldstein, 1976; Artus and Crockett, 1978; Bernholz, 1979; Bilson, 1979; Goldstein, 1980). The discipline argument rests on the premise that since expansionary policies in a fixed exchange-rate regime lead to persistent balance of payment deficits with a consequent loss of reserves and, ultimately a devaluation, an aversion to devaluation will restrain inflationary tendencies by decreasing the willingness of monetary authorities to accommodate wage and price increases that are inconsistent with productivity growth. Indeed, a major justification for the fixed exchange-rate regime was that external pressures to maintain price stability would curb domestic inflationary tendencies (Haberler, 1964; Yeager, 1968).

Keywords: Exchange Rate; Inflation Rate; Money Supply; Flexible Exchange Rate; Float Exchange Rate (search for similar items in EconPapers)
Date: 1984
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DOI: 10.1007/978-1-349-17474-4_6

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