de jure and de facto exchange rate regimes: pronouncements, expectations,

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• de jure and de facto exchange rate regimes
  pronouncements, expectations,
• unemployment and inflation
• Nicole Baerg,
• Emory University

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The research agenda

• Countries report their exchange rate regime to
  the IMF
• wave of empirical research says countries are de
  facto doing something different (GGW, LYS, RR,
  Frieden Stein)
• why report something that isnt true?

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The Literature

• Target Hypothesis
• other policy objectives taking the exchange rate
  regime elsewhere
• Institutional Hypothesis
• institutional deficiencies
• Communications Hypothesis
• strategic (but how?)

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Communication is key

• What countries say that they are doing has a
  direct bearing on the outcome. Genberg and
  Swoboda, 2005
• Literature is too new to explain how, why or to
  specify the outcome.

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Inflation Expectations

• One way communication may matter is if it
  relaxes the constraints policymakers face
• One domestic constraint is articulated by the
  Expectations Augmented Phillips Curve
• What happens if inflation is not perfectly
  anticipated?

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Augmenting Expectations
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Ha an increase in inflation when regimes diverge
is less than an increase in inflation when
regimes converge
DV change in per capita final consumption
expenditure. PCSE, AR(1) where p lt 0.10 p lt
0.05 p lt0.01
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• Policy announcements may partially solve the
  credibility problem
• A policymaker, like any actor with an agenda,
  can sometimes relate empirically invalid
  communication with a very clear purpose.
• Namely, supplying empirically incorrect
  information may (in the short term) give her the
  space to provide domestic macroeconomic goods.

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