Inflation, openness and exchange rate regimes + the quest for short-term commitment
By: Laura Alfaro
Contributors: Harvard Business School. Division of Research
Series: Working paper / Division of Research, Harvard Business School -- 02-014; Working paper (Harvard Business School. Division of Research) -- 02-014
Publisher: Division of Research, Harvard Business School
Published: 2001
Place of publication: Boston
Language: eng
Number of pages: 18
Description: This paper further tests Kydland and Prescott's (1977) predictions on dynamic-inconsistency problems. The two big advantages of fixingthe exchange rate are the reduction of transaction costs and exchange rate risk, which can discourage trade and investment plus the provision of a credible nominal anchor for monetary policy. Therefore, generalizing Romer's(1993) arguments, if the openness-inflation relation arises from the dynamic inconsistency of discretionary monetary policy, the relationship should be weaker in countries that have fixed exchange-rate regime dummy has a significant and negative correlation with openness after controlling for income per capita and after including both year and country dummies..
Notes: Includes bibliographical references.