"Exchange Rate Regimes and Inflation Dynamics in Emerging Economies: An Empirical Analysis from 2010 to 2019"

Abstract

This paper examines the relationship between inflation and exchange rate policies, with a particular emphasis on the influence of different exchange systems in emerging economies. Traditionally, fixed exchange rates were associated with stability and low inflation, from the Gold Standard period to the Bretton Woods system. Nevertheless, the shift towards more flexible regimes after 1971 resulted in increased unpredictability in both inflation and exchange rates, which showed the crucial role of choosing a suitable domestic monetary policy. This paper aims to analyze the impact of exchange rate regimes on inflation rates in emerging economies by specifically examining the effect of Hard and Soft Pegged exchange regimes versus Float exchange regimes by studying recent economic trends. The study covers a diverse sample of 30 emerging economies that represent different currency exchange regimes and geographical locations. Moreover, the levels of income and other economic factors (such as Board Mony Growth and Global Inflation) were considered over the period from 2010 to 2019. The study uses regression analysis to determine whether countries with pegged exchange rate regimes experience significantly lower domestic inflation rates compared to those with non-pegged regimes. Additionally, the study also considers other factors, such as global inflation and openness, to assess their influence on inflation. The findings of this paper are anticipated to give valuable insights to policymakers and scholars, more specifically into the efficient implementation of monetary policies in emerging markets. The findings also suggest that international inflation and the growth of broad money are important predictors of domestic inflation and that exchange rate regimes that are pegged are strongly associated with lower inflation rates compared to more flexible regimes. This study offers a comprehensive understanding of the relationship between exchange rate regime selection and inflation, taking into consideration other macroeconomic factors. This would provide a piece of critical knowledge about the relationship between these factors and the implications on monetary policies.