The Effectiveness of Monetary Policy Anchors: Firm-Level Evidence

Abstract

Analyses of monetary policy posit that exchange-rate pegs, inflation targets, and central bank independence can help anchor private-sector inflation expectations. Yet there are few direct tests of this argument. We offer cross-national, micro-level evidence on the effectiveness of monetary anchors in controlling private-sector inflation concerns. Using firm-level data from eighty-one countries (approximately 10,000 firms), we find evidence that “international” anchors (exchange-rate commitments) correlate significantly with a substantial reduction in private-sector concerns about inflation while “domestic” anchors (inflation targeting and central bank independence) do not. Our conjecture is that private-sector inflation expectations are more responsive to exchange-rate anchors because they are more transparent, more constraining, and more costly than domestic anchoring arrangements.

Inflation concerns and mass preferences over exchange‐rate policy

“…Nonetheless, such a connection can also raise concerns about reverse causality. Indeed, as Broz and Plouffe (2010) show, exchange rate regimes can affect inflation expectations. To address such endogeneity concerns—and also to further disentangle underlying mechanisms—we turn to framing experiments.…”

“…Moreover, anti‐inflationary effects also operate through the channel of imports. This has also further consequences at the firm level, where fixed exchange rates correlate with a reduction in private‐sector concerns about inflation (Broz & Plouffe, 2010). 10…”

“…Canonical models on preferences over currency policy focus on the ways the exchange rate affects international trade. From this standpoint, individuals’ attitudes about exchange rates fall along factoral, sectoral, or firm‐level lines (Bearce & Tuxhorn, 2017; Broz & Plouffe, 2010; Frieden, 1991). This paper focuses on an alternate view that hinges on the effects of exchange rates on consumers rather than producers 1…”

The structure of business preferences and Eurozone crisis policies

“…8The rich survey data from non-OECD economies via the World Bank Business Environment surveys do not cover Eurozone firms during the crisis. Many studies that use firm-level data focus on those from economies in developing countries during non-crisis periods and examine views about corruption, policy uncertainty, and preferences for exchange rates (Kenyon and Naoi (2010); Broz, Frieden, and Weymouth (2008); Broz and Plouffe (2010); Batra, Kaufmann, and Stone (2003); Barber, Pierskalla, and Weschle (2014)). Weymouth (2012) examines the determinants of firm lobbying in non-OECD countries, and Plouffe (2017) and Osgood et al (2017) examine business preferences over trade policy in other non-European contexts.…”

“…Lacasa (2013). 7Broz and Plouffe (2010);Duckenfield and Aspinwall (2010). 8 The rich survey data from non-OECD economies via the World Bank Business Environment surveys do not cover Eurozone firms during the crisis.…”