Abstract
Many developing and emerging economies officially report a managed floating exchange-rate regime tailored with a fundamental exchange rate management approach, while in practice operating a de facto soft peg, characterized by discretionary, near-constant exchange-rate depreciation aimed at dampening inflation expectations. This discretionary approach—often justified as a pragmatic response to inflationary pressure—produces a hybrid regime that lacks the transparency and credibility emphasized in IMF policy guidance. This study evaluates whether substituting Discretionary Soft-Peg Exchange Rate Management approach with an Inflation-Differential Rule of Exchange Rate Management approach, which links exchange-rate adjustments to the inflation differential between domestic and rest of the world, improves macroeconomic outcomes and resilience. A small open-economy DSGE model, calibrated to Iranian structural parameters, is developed to conduct a comparative analysis of (i) steady-state equilibrium values and (ii) economic resilience to external shocks, employing stability index as the primary criterion of ER quantified using two statistics—specifically, the variance and autocorrelation coefficient of key macroeconomic variables following external shocks. The results show that the rulebased approach produces lower steady-state inflation, and significantly greater resilience to both worldwide shocks and country-specific shocks. These findings contribute to ongoing debates about improving credibility, transparency, and shockabsorption capacity in developing economies with persistent inflationary pressures.