recent years, many central banks have placed increased emphasis on price stability. Monetary policy—whether expressed in terms of interest rates or growth of monetary aggregates—has been increasingly geared toward the achievement of low and stable inflation. Central bankers and most other observers view price stability as a worthy objective because they think that inflation is costly. Some of these costs involve the average rate of inflation, and others relate to the variability and uncertainty of inflation. But the general idea is that businesses and households are thought to perform poorly when inflation is high and unpredictable. The academic literature contains a lot of theoretical work on the costs of inflation, as reviewed recently by Briault (1995). This analysis provides a presumption that inflation is a bad idea, but the case is not decisive without supporting empirical findings. Although some empirical results (also surveyed by Briault) suggest that inflation is harmful, the evidence is not overwhelming. It is therefore important to carry out additional empirical research on the relation between inflation and economic performance. This article explores this relation in a large sample of countries over the last 30 years.

numerous officials of the Government of Kazakhstan and seminar participants at the World Bank for helpful comments on earlier drafts. The views expressed are those of the authors and do not necessarily reflect those of the World Bank, its Executive Directors, any of its member governments, the International Monetary Fund, the Government of Kazakhstan or those acknowledged. Summary Exchange Rate Overvaluation and Trade Protection: Lessons from Experience Despite a general trend toward more flexible exchange rate regimes, over half the countries in the world maintain fixed or managed exchange rates. There are clearly advantages and disadvantages of both fixed and flexible exchange rate systems and their variants, and we do not discuss their relative merits in this paper. Rather, we note that, as a practical matter, exchange rate management in many countries has resulted in overvaluation of the real exchange rate. Estimates suggest that about 25 percent of the countries for which we have data have overvalued exchange rates, with black market premiums from 10 percent to more than 100 percent.