Advanced Search
MyIDEAS: Login to save this paper or follow this series

Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Contents:

Author Info

  • Juan Carlos Berganza

    ()
    (Banco de España)

  • Carmen Broto

    ()
    (Banco de España)

Abstract

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of "strict IT", which imply a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.

Download Info

If you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
File URL: http://www.bde.es/f/webbde/SES/Secciones/Publicaciones/PublicacionesSeriadas/DocumentosTrabajo/11/Fich/dt1105e.pdf
File Function: First version, April 2011
Download Restriction: no

Bibliographic Info

Paper provided by Banco de Espa�a in its series Banco de Espa�a Working Papers with number 1105.

as in new window
Length: 37 pages
Date of creation: Apr 2011
Date of revision:
Handle: RePEc:bde:wpaper:1105

Contact details of provider:
Email:
Web page: http://www.bde.es/
More information through EDIRC

Related research

Keywords: inflation targeting; exchange rate volatility; foreign exchange interventions; emerging economies;

Other versions of this item:

Find related papers by JEL classification:

This paper has been announced in the following NEP Reports:

References

References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
as in new window
  1. Lars E.O. Svensson, 2010. "Inflation Targeting," NBER Working Papers 16654, National Bureau of Economic Research, Inc.
  2. Rose, Andrew K., 2007. "A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(5), pages 663-681, September.
  3. Eduardo Levy Yeyati and Federico Sturzenegger, 2007. "Fear of Appreciation," Business School Working Papers, Universidad Torcuato Di Tella fearapp, Universidad Torcuato Di Tella.
  4. Tatiana Kirsanova & Campbell Leith & Simon Wren-Lewis, 2006. "Should Central Banks Target Consumer Prices or the Exchange Rate?," Economic Journal, Royal Economic Society, Royal Economic Society, vol. 116(512), pages F208-F231, 06.
  5. repec:nbr:nberwo:12876 is not listed on IDEAS
  6. Hali Edison & Paul Cashin & Hong Liang, 2006. "Foreign exchange intervention and the Australian dollar: has it mattered?," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 11(2), pages 155-171.
  7. Mishkin, Frederic S. & Savastano, Miguel A., 2001. "Monetary policy strategies for Latin America," Policy Research Working Paper Series 2685, The World Bank.
  8. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper 14000, University Library of Munich, Germany.
  9. Cavoli, Tony, 2008. "The exchange rate and optimal monetary policy rules in open and developing economies: Some simple analytics," Economic Modelling, Elsevier, Elsevier, vol. 25(5), pages 1011-1021, September.
  10. Carlos García & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes," Working Papers Central Bank of Chile, Central Bank of Chile 533, Central Bank of Chile.
  11. Herman Kamil, 2008. "Is Central Bank Intervention Effective Under Inflation Targeting Regimes? the Case of Colombia," IMF Working Papers 08/88, International Monetary Fund.
  12. Kim, Suk-Joong & Sheen, Jeffrey, 2002. "The determinants of foreign exchange intervention by central banks: evidence from Australia," Journal of International Money and Finance, Elsevier, Elsevier, vol. 21(5), pages 619-649, October.
  13. Hausman, Jerry A., 1983. "Specification and estimation of simultaneous equation models," Handbook of Econometrics, Elsevier, in: Z. Griliches† & M. D. Intriligator (ed.), Handbook of Econometrics, edition 1, volume 1, chapter 7, pages 391-448 Elsevier.
  14. Arellano, Manuel & Bond, Stephen, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 58(2), pages 277-97, April.
  15. André Minella & Paulo Springer de Freitas & Ilan Goldfajn & Marcelo Kfoury Muinhos, 2003. "Inflation Targeting in Brazil: Constructing Credibility Under Exchange Rate Volatility," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting], ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Gr b26, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  16. Irineu E. Carvalho Filho, 2010. "Inflation Targeting and the Crisis," IMF Working Papers 10/45, International Monetary Fund.
  17. Obstfeld, Maurice & Shambaugh, Jay C & Taylor, Alan M, 2004. "The Trilemma in History: Trade-offs Among Exchange Rates, Monetary Policies and Capital Mobility," CEPR Discussion Papers, C.E.P.R. Discussion Papers 4352, C.E.P.R. Discussion Papers.
  18. Carlos Garcia & Jorge Restrepo & Scott Roger, 2009. "Hybrid Inflation Targeting Regimes1," ILADES-Georgetown University Working Papers, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines inv226, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines.
  19. Cavoli, Tony, 2009. "Is fear of floating justified?: The East Asia experience," Journal of Policy Modeling, Elsevier, Elsevier, vol. 31(1), pages 1-16.
  20. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, Elsevier, vol. 44(7), pages 1389-1408, June.
  21. Mihov, Ilian & Rose, Andrew K, 2007. "Is Old Money Better than New? Duration and Monetary Regimes," CEPR Discussion Papers, C.E.P.R. Discussion Papers 6529, C.E.P.R. Discussion Papers.
  22. Joshua Aizenman & Michael Hutchison & Ilan Noy, 2008. "Inflation Targeting and Real Exchange Rates in Emerging Markets," NBER Working Papers 14561, National Bureau of Economic Research, Inc.
  23. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, Elsevier, vol. 85(1-2), pages 312-318, February.
  24. Brito, Ricardo D. & Bystedt, Brianne, 2010. "Inflation targeting in emerging economies: Panel evidence," Journal of Development Economics, Elsevier, Elsevier, vol. 91(2), pages 198-210, March.
  25. Hakan Yilmazkuday, 2007. "Inflation targeting supported by managed exchange rate," Applied Economics, Taylor & Francis Journals, Taylor & Francis Journals, vol. 39(16), pages 2011-2026.
  26. Hwee Kwan Chow & Paul D. McNelis, 2010. "Need Singapore Fear Floating? A DSGE-VAR Approach," Working Papers, Singapore Management University, School of Economics 29-2010, Singapore Management University, School of Economics.
  27. Andrea Tokman & Rodrigo Valdés & José De Gregorio, 2005. "Flexible Exchange Rate with Inflation Targeting in Chile: Experience and Issues," IDB Publications 6696, Inter-American Development Bank.
  28. Anna Nordstrom & Scott Roger & Mark R. Stone & Seiichi Shimizu & Turgut Kisinbay & Jorge Restrepo, 2009. "The Role of the Exchange Rate in Inflation," IMF Occasional Papers 267, International Monetary Fund.
  29. Domac, Ilker & Mendoza, Alfonso, 2004. "Is there room for foreign exchange interventions under an inflation targeting framework ? Evidence from Mexico and Turkey," Policy Research Working Paper Series 3288, The World Bank.
  30. Lin, Shu & Ye, Haichun, 2009. "Does inflation targeting make a difference in developing countries?," Journal of Development Economics, Elsevier, Elsevier, vol. 89(1), pages 118-123, May.
  31. Holub, Tomáš, 2004. "Foreign exchange interventions under inflation targeting: the Czech Experience," Research Notes 17, Deutsche Bank Research.
  32. Eric Parrado, 2004. "Inflation Targeting and Exchange Rate Rules in an Open Economy," IMF Working Papers 04/21, International Monetary Fund.
  33. Inci Ötker & David Vávra & Francisco F. Vázquez & Luis Ignacio Jácome & Karl Friedrich Habermeier & Kotaro Ishi & Alessandro Giustiniani & Turgut Kisinbay, 2009. "Inflation Pressures and Monetary Policy Options in Emerging and Developing Countries-A Cross Regional Perspective," IMF Working Papers 09/1, International Monetary Fund.
  34. Carranza, Luis & Galdon-Sanchez, Jose E. & Gomez-Biscarri, Javier, 2009. "Exchange rate and inflation dynamics in dollarized economies," Journal of Development Economics, Elsevier, Elsevier, vol. 89(1), pages 98-108, May.
  35. Wu, De-Min, 1973. "Alternative Tests of Independence Between Stochastic Regressors and Disturbances," Econometrica, Econometric Society, Econometric Society, vol. 41(4), pages 733-50, July.
  36. Gonçalves, Carlos Eduardo S. & Carvalho, Alexandre, 2008. "Who chooses to inflation target?," Economics Letters, Elsevier, Elsevier, vol. 99(2), pages 410-413, May.
  37. Dominguez, Kathryn M., 1998. "Central bank intervention and exchange rate volatility1," Journal of International Money and Finance, Elsevier, Elsevier, vol. 17(1), pages 161-190, February.
  38. Harvey, Andrew & Ruiz, Esther & Shephard, Neil, 1994. "Multivariate Stochastic Variance Models," Review of Economic Studies, Wiley Blackwell, Wiley Blackwell, vol. 61(2), pages 247-64, April.
Full references (including those not matched with items on IDEAS)

Citations

Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
as in new window

Cited by:
  1. Marc Pourroy, 2013. "Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies," Documents de travail du Centre d'Economie de la Sorbonne, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne 13074, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Pablo Pincheira, 2013. "Interventions and Inflation Expectations in an Inflation Targeting Economy," Working Papers Central Bank of Chile, Central Bank of Chile 693, Central Bank of Chile.
  3. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.
  4. Broto, Carmen, 2013. "The effectiveness of forex interventions in four Latin American countries," Emerging Markets Review, Elsevier, Elsevier, vol. 17(C), pages 224-240.
  5. Vithessonthi, Chaiporn, 2014. "Monetary policy and the first- and second-moment exchange rate change during the global financial crisis: Evidence from Thailand," Journal of International Financial Markets, Institutions and Money, Elsevier, Elsevier, vol. 29(C), pages 170-194.
  6. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series, Central Bank of Brazil, Research Department 324, Central Bank of Brazil, Research Department.
  7. Moura, Marcelo L. & Pereira, Fatima R. & Attuy, Guilherme de Moraes, 2013. "Currency Wars in Action: How Foreign Exchange Interventions Work in an Emerging Economy," Insper Working Papers, Insper Working Paper, Insper Instituto de Ensino e Pesquisa wpe_304, Insper Working Paper, Insper Instituto de Ensino e Pesquisa.
  8. Rathin Roy & Raquel Almeida Ramos, 2012. "IMF Article IV Reports: An Analysis of Policy Recommendations," Working Papers 86, International Policy Centre for Inclusive Growth.
  9. Runchana Pongsaparn & Panda Ketruangroch & Dhanaporn Hirunwong, 2012. "Monetary Policy conduct in Review: The Appropriate Choice of Instruments," Working Papers, Economic Research Department, Bank of Thailand 2012-05, Economic Research Department, Bank of Thailand.

Lists

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

Statistics

Access and download statistics

Corrections

When requesting a correction, please mention this item's handle: RePEc:bde:wpaper:1105. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Mar�a Beiro. Electronic Dissemination of Information Unit. Research Department. Banco de Espa�a).

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.