Pursuing a policy of exchange rate stability reduces the probability of banking crises, particularly in developing countries.

This paper examines the effect of the real exchange rate misalignment (RERMIS) on the collective economic growth of Egypt, Jordan, Morocco, and Tunisia. The paper constructs three measures of exchange rate misalignment based on purchasing power parity; a black market exchange rate; and a structured model. The empirical investigation confirmed the adverse effect of RERMIS on growth, using all measures of RERMIS, as predicted by endogenous growth models. The results also highlighted the role of other factors; specifically, capital growth and population have the theoretical signs predicted by the Solow growth model and are statistically significant.

"Emerging market economies (EMEs) have experienced a noticeable decline in inflation since the mid-1990s. Whether this stable price environment in EMEs is likely to endure and what kind of policies need to be followed to ensure price stability, however, still continue to be questions of considerable policy relevance. Doma ̇and Ycel investigate the factors associated with the start of 24 inflation episodes in 15 EMEs between 1980 and 2001. They use pooled probit analysis to estimate the contribution of the key factors to inflation starts. Their empirical results suggest that increases in the output gap, agricultural shocks, and expansionary fiscal policy raise the probability of inflation starts in EMEs. Their findings also indicate that a more democratic environment and an increase in capital flows relative to GDP reduce the probability of inflation starts. This papera product of the Poverty Reduction and Economic Management Sector Unit, Europe and Central Asia Regionis part of a larger effort in the region to enhance knowledge on the inflationary process and its policy implications"-- World Bank web site.

Policymakers in Malaysia should weigh the distributional consequences of policy actions. They should also consider measures to alleviate the disproportionate impact that market imperfections have on small and medium-size industries.

The exchange rate regime does make a difference for inflation performance. It is difficult to infer its effect on growth, but policy variables, and other variables influencing economic activity, do have different effects on growth under different exchange-rate arrangements.