Exchange rate regimes and monetary discipline - only hard pegs make a difference

Abstract

Previous research has suggested that pegged exchange rates are associated with lower inflation than floating rates. In which direction does the causality run? Using data from a large sample of developing countries from 1984 to 2000, we confirm that "hard" pegs (currency boards or a shared currency) reduce inflation and money growth. There is no evidence that "soft" pegs confer any monetary discipline. The choice between soft pegs and floats is determined by inflation: when inflation is low, pegs tend to be chosen and sustained, and when inflation is high, either floats are chosen or there are frequent regime switches.