Monetary discipline and inflation in developing countries: the role of theexchange rate regime

Adherence to a pegged exchange rate regime has the potential to affect infl ation in two ways: by instilling monetary discipline and by altering the re lationship between money and prices, because shocks to the money stock are absorbed partly by changes in the balance of payments. Although the latter is a disequilibrium phenomenon (if balance of payments deficits are unsusta inable in the long run), it might still be important in the medium term. Ev idence on the relative importance and magnitude of the two effects is prese nted, using cross-sectional macroeconomic data from 80 LDCs. Both effects a re found to be significant.