Adopting the exchange rate as a nominal anchor for monetary stabilization has proved costly in a number of countries as inflationary inertia produces severe real exchange rate appreciation. What causes inflation persistence? Complementary to existing explanation such as staggered contracts and...

This paper suggests a structural connection between rational speculative activity and exchange rate volatility. We note that, when Friedman originally claimed that rational speculators must smooth exchange rate, he excluded interest rate differentials form his interpretation of speculator...

This paper studies the dynamics of inflation if monetary policy is transparent only to part of the population. We find that average long-run inflation decreases in the proportion of agents with naive expectations and, because of tradeoffs between speed of adjustment and long-run inflation,...