Fixed Exchange Rate Regimes and Inflation Performance: Evidence from MENA Countries

Abstract

In this paper we study the empirical evidence on inflation performance of fixed but adjustable exchange rate regimes in MENA over the period of 1980-2007, using exchange rate regimes as declared (de jure) and as observed (de facto). We identify credible regimes by matching what is announced and what is observed. Our results suggest that, even when accounting for possible endogeneity, credible pegs were associated with lower inflation, while declared fixed exchange rates were not significantly associated with lower inflation. Moreover, there is substantial evidence that suggests that countries, who have often announced more exchange rate flexibility in order to avoid speculative attacks while maintaining a stable exchange rate, were successful in achieving low inflation.