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Fixed Exchange Rates, Inflation and Macroeconomic Discipline

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  • Sebastian Edwards
  • Fernando J. Losada

Abstract

We use data from Guatemala and Honduras to investigate some implications of the Purchasing Power Parity theory over the long run. In particular, we address two questions. First, to what extent did the fixed exchange rate regime impose macroeconomic discipline on these countries. Second, what was the impact of terms of trade shocks and growth differentials on inflation rate differentials between those countries and the United States. We found that the fixed parities regime worked properly until the mid-1970s, providing some constraint on central bank behavior. However, the evidence suggests that the fixed exchange rate system was not sufficient to avoid inflation outbursts and balance of payments crises. Specifically, it was unable to accommodate large negative terms of trade shocks in the late 1970s and early 1980s.

Suggested Citation

  • Sebastian Edwards & Fernando J. Losada, 1994. "Fixed Exchange Rates, Inflation and Macroeconomic Discipline," NBER Working Papers 4661, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:4661
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    References listed on IDEAS

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    Cited by:

    1. Gerardo Esquivel & Felipe Larrain B., 1999. "Currency Crises: Is Central America Different?," CID Working Papers 26A, Center for International Development at Harvard University.
    2. Savvides, Andreas, 1998. "Inflation and monetary policy in selected West and Central African countries," World Development, Elsevier, vol. 26(5), pages 809-827, May.
    3. Frankel, Jeffrey A. & Mendoza, Enrique G., 2000. "Comments," LSE Research Online Documents on Economics 123378, London School of Economics and Political Science, LSE Library.

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