Does a flexible exchange rate regime increase inflation persistence?

A dynamic panel model with country and regime-specific smooth shifts in mean is applied to examine the impacts of exchange rate regimes on inflation persistence. We provide robust support for higher inflation persistence under floating rates than under pegged rates. However, the impacts of the exchange rate regime on relative inflation persistence is ambiguous. The neutrality of exchange rate regimes to inflation persistence tends to be observed if smooth shifts in mean are not controlled. Failure to control for contemporaneous correlation of disturbances and smooth shifts in mean overestimates inflation persistence.