Implications of New Keynesian Theory for Research Design : Differences Induced by Cross-Country Variations in Exchange Rate Regimes

Relative to free floating exchange rate regimes, I find the adoption of a hybrid exchange rate regime induces alternate research questions within the context of new Keynesian theory. Specifically, while exchange rates are measures of differences in monetary equilibria within a cross-section of countries that run free floating exchange rate regimes, it is balance of payments situations that constitute measures of differences in monetary equilibria within a cross-section of countries that run hybrid exchange rate regimes. Also, while relations between deposit or lending interest rates and inflows of Foreign Direct Investment (FDI) into countries with hybrid exchange rate regimes yield insights into the extent to which inflows of foreign capital induce distortionary effects on price equilibriums, these relations do not yield similar insights within a cross-section of countries that run free floating exchange rate regimes. An important implication of these empirical results is that inflation is not a measure of differences in price equilibriums within a cross-section of countries that operate hybrid exchange rate regimes. These findings, generated within the context of new Keynesian theory, identify theoretically appropriate differences in research questions and research design or methodology conditional on differences in exchange rate regimes