Publication Type: Conference Paper/Unpublished Manuscript
Abstract: Analyses of monetary policy posit that exchange-rate pegs, inflation targets, and central bank independence discipline monetary policy decision-making and serve as anchors for private sector inflation expectations. Yet there are few direct empirical tests of these arguments. We offer cross-national, micro-level evidence on the effectiveness of monetary anchors in controlling private sector inflation expectations. Using firm-level data from the World Bank’s World Business Environment Survey (81 countries, ~10,000 firms), we find that fixed exchange rate regimes (de facto and de jure) reduce firm owners’ concerns about inflation, improve their assessments of economic policy predictability, and increase their regard for the quality of the central bank. By contrast, central bank independence (de facto and de jure) and inflation targets are unrelated to firm owners' inflation concerns, perceptions of policy predictability, and ratings of central bank quality. Overall, our results suggest that private sector perceptions are only sensitive to the most transparent, constraining, and costly of monetary anchors: exchange rate pegs.