Adopting the exchange rate as a nominal anchor for monetary stabilization has proved costly in a number of countries as inflationary inertia produces severe real exchange rate appreciation. What causes inflation persistence? Complementary to existing explanation such as staggered contracts and low credibility, we note that the introduction of a new monetary rule, such as a fixed exchange rate reduces inflationary expectations immediately to the target level only if all agents understand the implications of the rule.
Exchange Rate, Inflation
Date of this Version