Inflation, openness and exchange rate regimes
Subtitle: the quest for short-term commitment
By: Laura Alfaro
Contributors: Harvard Business School. Division of Research
Edition: Rev.
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: 2002
Place of publication: Boston]
Language: eng
Number of pages: 35
Description: This paper further tests Kydland and Prescott's (1977) predictions on dynamic-inconsistency problems. The two big advantages of fixing the 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: "Rev. 07/02."

Includes bibliographical references.