Working Paper

Is pegging the exchange rate a cure for inflation? East Asian experiences

Abstract: A common argument for pegging the exchange rate is that it enforces discipline on domestic monetary policy, thus stabilizing inflation expectations. This paper argues that this reasoning does not necessarily apply to East Asia, as the nominal exchange rate pegging policies of these economies are not the explanation for their low inflation. On the contrary, since 1985, those economies whose currencies have appreciated less against the U.S. dollar have tended to experience higher inflation. Factors other than pegging, such as rapid growth, sustainable budget deficits, and relative openness most likely explain the relative success of East Asian economies in achieving low inflation.

Keywords: East Asia; Foreign exchange - Law and legislation; Inflation (Finance); Monetary policy;

Status: Published in Exchange-rate policies for emerging market economies (West View Press, 1999, p 165-193)

Bibliographic Information

Provider: Federal Reserve Bank of San Francisco

Part of Series: Pacific Basin Working Paper Series

Publication Date: 1995

Number: 95-08