Exchange Rate Regimes and Inflation Persistence

Some empirical research has suggested that inflation is more persistent under floating exchange rates. Theoretically, we should expect a higher variance of inflation persistence across countries under floating rates, but not necessarily a higher mean. It is shown that estimates of inflation persistence are biased upwards by underfitting mean shifts in the sample. After correction for mean shifts, there is evidence of greater inflation persistence in the post ­Bretton Woods period, but no evidence of variation across exchange rate regimes. Monetary growth has been much less accommodative of inflation since 1979, with no difference between EMS and non-EMS countries. Copyright 2001, International Monetary Fund