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The Effectiveness of Monetary Policy Anchors: Firm-Level Evidence

Published online by Cambridge University Press:  12 October 2010

J. Lawrence Broz
Affiliation:
University of California, San Diego. E-mail: jlbroz@ucsd.edu
Michael Plouffe
Affiliation:
University of California, San Diego. E-mail: mplouffe@ucsd.edu
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Abstract

Analyses of monetary policy posit that exchange-rate pegs, inflation targets, and central bank independence can help anchor private-sector inflation expectations. Yet there are few direct tests of this argument. We offer cross-national, micro-level evidence on the effectiveness of monetary anchors in controlling private-sector inflation concerns. Using firm-level data from eighty-one countries (approximately 10,000 firms), we find evidence that “international” anchors (exchange-rate commitments) correlate significantly with a substantial reduction in private-sector concerns about inflation while “domestic” anchors (inflation targeting and central bank independence) do not. Our conjecture is that private-sector inflation expectations are more responsive to exchange-rate anchors because they are more transparent, more constraining, and more costly than domestic anchoring arrangements.

Type
Research Note
Copyright
Copyright © The IO Foundation 2010

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References

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