Working Paper

Does the choice of nominal anchor matter?

Abstract: The conventional wisdom on nominal anchors is that exchange rate-based inflation stabilizations lead to economic booms while monetary-based stabilizations lead to recessions. This study finds strong evidence against this view. Rather than determining the path of economic growth, the choice of nominal anchor appears to be endogenously determined by the state of the economy. To peg or manage the exchange rate, a high level of international reserves is important, especially when a government?s credibility is low after a period of high inflation. After controlling for the level of international reserves and the rate of inflation, growth after monetary-based stabilizations does not significantly differ from that following exchange rate-based stabilizations.

Keywords: Inflation stabilization; exchange rate regimes; business cycles;

JEL Classification: E32; F31; F41;

Bibliographic Information

Provider: Federal Reserve Bank of Dallas

Part of Series: Working Papers

Publication Date: 1999-12-01

Number: 9914