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Table of Contents

Introduction 3

Fixed Exchange rate and Disinflation in emerging markets 6

Exchange Rate proclamation and Inflation fighting credibility 9

Exchange rates, inflation and growth in small, open economies:

A difference-in-differences approach 12

Monetary policy rules under a fixed exchange rate regime: Empirical

Evidence from China 15

Fixed exchange rates and trade 17

Conclusion 19

Bibliography 22

Introduction

This research paper looks to explore the relationship behind the infamous fixed exchange rate and the level of inflation. I also take a look at how there is a trade off between the exchange rate regime and trade activity shapes up.

Fixed exchange rates are a monetary regime used by around 50% of the world’s economies. The advent of fixed exchange rates is not common in the developed world. One exception to this is the EU which maintains a very stringently monitored monetary policy. Fixed exchange rates are a popular policy tool in the emerging economies, where the governing elements are more interested and inclined towards keeping the rate of inflation low so that maximum public welfare can be provided (Rowlands 2009).

The fixed exchange rates have been for a very long time been advocated as the primary strategy for fighting inflation. Inflation in itself is a