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Exchange rates, inflation and growth in small, open economies: a difference-in-differences approach

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  • William Miles

Abstract

Financial crises in emerging markets have led many observers to recommend abandoning fixed exchange rates and adopting more flexible regimes. Moreover, some recent research suggests that the correct exchange rate regime may have a significant effect on inflation and even economic growth. The estimated effect found in such studies, however, likely suffers from an upward bias, as countries which choose a given exchange rate regime have other hard-to-measure policies and attributes which also affect economic performance. Utilizing a recent data set on actual, as opposed to official exchange rate regimes, this article employs the difference-in-differences method, currently popular in applied microeconomics, to a set of emerging markets that switched to more flexible currency policies. Results indicate that, contrary to previous studies, exchange rates themselves exert no significant impact on inflation or output.

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  • William Miles, 2008. "Exchange rates, inflation and growth in small, open economies: a difference-in-differences approach," Applied Economics, Taylor & Francis Journals, vol. 40(3), pages 341-348.
    • Handle: RePEc:taf:applec:v:40:y:2008:i:3:p:341-348
    DOI: 10.1080/00036840600639881
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    1. Laurence M. Ball & Niamh Sheridan, 2004. "Does Inflation Targeting Matter?," NBER Chapters, in: The Inflation-Targeting Debate, pages 249-276, National Bureau of Economic Research, Inc.
    2. Sebastian Edwards & Igal Magendzo, 2003. "A Currency of One's Own? An Empirical Investigation on Dollarization and Independent Currency Unions," NBER Working Papers 9514, National Bureau of Economic Research, Inc.
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    Cited by:

    1. Wu, Jo-Wei & Wu, Jyh-Lin, 2018. "Does a flexible exchange rate regime increase inflation persistence?," Journal of International Money and Finance, Elsevier, vol. 86(C), pages 244-263.
    2. William MILES, 2011. "Financial Globalization And Inflation In Developing Countries: A Reappraisal," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 11(1).
    3. Lee, Chin, 2013. "The Role of Macroeconomic Fundamentals in Malaysian Post Recession Growth," MPRA Paper 44808, University Library of Munich, Germany.
    4. Biswajit Mohanty & N.R. Bhanumurthy, 2014. "Exchange Rate Regimes and Inflation: Evidence from India," International Economic Journal, Taylor & Francis Journals, vol. 28(2), pages 311-332, June.
    5. Contreras, Alex & Gondo, Rocío & Oré, Erick & Pérez, Fernando, 2019. "Evaluando el impacto de las medidas de desdolarización del crédito en el Perú," Working Papers 2019-005, Banco Central de Reserva del Perú.
    6. William Miles & Samuel Schreyer, 2014. "Is monetary policy non-linear in Latin America? a quantile regression approach to Brazil, Chile, Mexico and Peru," Journal of Developing Areas, Tennessee State University, College of Business, vol. 48(2), pages 169-183, April-Jun.

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