Review of World Economics

, Volume 144, Issue 3, pp 538–557 | Cite as

Fixed Exchange Rates and Disinflation in Emerging Markets: How Large Is the Effect?

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Abstract

We examine developing countries which have institutional quality ratings for the effects of exchange rate rigidity on inflation. The level of institutional development exerts no effect on the impact of currency regimes. However, the interaction of institutional quality and exchange rates has, in the most plausible specifications, a negative impact on inflation. This suggests that fixed exchange rates exert at most a contingent effect on inflation, and indicates that countries in Eastern Europe and Latin America contemplating currency pegs would be better off improving institutional quality prior to adopting the euro or dollar and expecting a large subsequent disinflationary effect.

Keywords

Exchange rates inflation 

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Copyright information

© Kiel Institute 2008

Authors and Affiliations

  1. 1.Bentley CollegeWalthamUSA
  2. 2.Department of EconomicsWichita State UniversityWichitaUSA

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