 Do Exchange Rate Regimes Matter For Inflation And Exchange Rate Dynamics? The Case Of Central AmericaRodrigo Caputo and Igal Magendzo Working Papers Central Bank of Chile from Central Bank of Chile Abstract: This paper makes an empirical contribution to the discussion on the optimal exchange rate regime. Using as astudy case the experience of the Central American countries, we compare the dynamics of the Real Exchange Rate (RER) and inflation persistence between dollarized economies and countries with some degree of exchange rate flexibility. Our results show that the two dollarized countries in the region, El Salvador and Panama, are quite different in terms of RER and inflation dynamics. While in El Salvador the RER spends more time away from the equilibrium level than the non-dollarized countries in the region, the opposite is true for Panama. We also find that inflation persistence in El Salvador is similar to that of the other countries, but smaller in Panama. This leads us to the conclusion that some degree of exchange rate flexibility helps countries to have a RER more aligned with its fundamentals. Nevertheless, a long-lived, highly credible dollarized economy, like Panama, can reduce inflation persistence to such an extent that RER misalignments are actually less frequent than in countries with more flexible exchange rate regimes. Date: 2009-06 Downloads: (external link) Related works: Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text Persistent link: https://EconPapers.repec.org/RePEc:chb:bcchwp:517 Access Statistics for this paper More papers in Working Papers Central Bank of Chile from Central Bank of Chile Contact information at EDIRC. |
Is your work missing from RePEc? Here is how to contribute.
Questions or problems? Check the EconPapers FAQ or send mail to .
EconPapers is hosted by the
School of Business at Örebro University.