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Inflation Targeting and Real Exchange Rates in Emerging Markets

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  • Aizenman, Joshua
  • Hutchison, Michael
  • Noy, Ilan

Abstract

Summary We investigate inflation targeting (IT) in emerging markets, focusing on the role of the real exchange rate and the distinction between commodity and non-commodity exporters. IT emerging markets appear to follow a "mixed strategy" whereby both inflation and real exchange rates are important determinants of policy interest rates. The response to real exchange rates, however, is more constrained than in non-IT regimes. We also find that the response to real exchange rates is strongest in those countries following IT policies that are relatively intensive in exporting basic commodities; and present a theoretical model that explains these empirical results.

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Bibliographic Info

Article provided by Elsevier in its journal World Development.

Volume (Year): 39 (2011)
Issue (Month): 5 (May)
Pages: 712-724

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Handle: RePEc:eee:wdevel:v:39:y:2011:i:5:p:712-724

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Web page: http://www.elsevier.com/locate/worlddev

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Keywords: inflation targeting Taylor rule real exchange rate commodity export;

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