Exchange Rates as Nominal Anchors

Sebastian Edwards

No 4246, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This paper discusses the use of nominal exchange rates as nominal anchors in stabilization programs. The first part deals with the dynamics of inflation in highly indexed economies. It is shown that credible exchange rate anchors will reduce the degree of inflationary inertia. However, if some residual inertia is maintained in some contracts, real exchange rate overvaluation will result. Data from Chile, Mexico and Yugoslavia are used to test the implications of the model. The second part deals with the long run, and uses a 56 countries data set to investigate whether fixed exchange rates have been associated with greater financial discipline.

Date: 1992-12
Note: ITI IFM
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Published as Edwards, Sebastian. “Exchange Rates as Nominal Anchors." Weltwirtschaftliches Archiv 129, 1 (1993): 1-32.
Published as Sebastian Edwards, 1993. "Exchange rates as nominal anchors," Review of World Economics, vol 129(1), pages 1-32.

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