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

Inflation Targeting and Real Exchange Rates in Emerging Markets

Contents:

Author Info

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

Abstract

We examine the inflation targeting (IT) experiences of emerging market economies, focusing especially on the roles of the real exchange rate and the distinction between commodity and non-commodity exporting nations. In the context of a simple empirical model, estimated with panel data for 17 emerging markets using both IT and non-IT observations, we find a significant and stable response running from inflation to policy interest rates in emerging markets that are following publically announced IT policies. By contrast, central banks respond much less to inflation in non-IT regimes. IT emerging markets follow a “mixed IT strategy†whereby both inflation and real exchange rates are important determinants of policy interest rates. The response to real exchange rates is much stronger in non-IT countries, however, suggesting that policymakers are more constrained in the IT regime—they are attempting to simultaneously target both inflation and real exchange rates and these objectives are not always consistent. 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. We present a simple model that explains this empirical result.

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.escholarship.org/uc/item/6d23q90v.pdf;origin=repeccitec
Download Restriction: no

Bibliographic Info

Paper provided by Department of Economics, UC Santa Cruz in its series Santa Cruz Department of Economics, Working Paper Series with number qt6d23q90v.

as in new window
Length:
Date of creation: 01 Dec 2008
Date of revision:
Handle: RePEc:cdl:ucscec:qt6d23q90v

Contact details of provider:
Postal: Santa Cruz, CA 95064
Phone: (831) 459-2743
Fax: (831) 459-5077
Email:
Web page: http://www.escholarship.org/repec/ucscecon/
More information through EDIRC

Related research

Keywords: Inflation targeting; real exchange rate; commodity exporters; emerging markets;

Other versions of this item:

Find related papers by JEL classification:

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. Corbo, Vittorio & Landerretche, Oscar & Schmidt-Hebbel, Klaus, 2001. "Assessing Inflation Targeting after a Decade of World Experience," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 6(4), pages 343-68, October.
  2. Laurence M. Ball, 1999. "Policy Rules for Open Economies," NBER Chapters, National Bureau of Economic Research, Inc, in: Monetary Policy Rules, pages 127-156 National Bureau of Economic Research, Inc.
  3. repec:nbr:nberwo:12876 is not listed on IDEAS
  4. Aizenman, Joshua & Riera-Crichton, Daniel, 2007. "Real exchange rate and international reserves in an era of growing financial and trade integration," Santa Cruz Department of Economics, Working Paper Series, Department of Economics, UC Santa Cruz qt6dr794sb, Department of Economics, UC Santa Cruz.
  5. Alina Carare & Mark R. Stone, 2003. "Inflation Targeting Regimes," IMF Working Papers, International Monetary Fund 03/9, International Monetary Fund.
  6. Hausman, Jerry A. & Taylor, William E., 1981. "Panel data and unobservable individual effects," Journal of Econometrics, Elsevier, Elsevier, vol. 16(1), pages 155-155, May.
  7. Philippe Aghion & Philippe Bacchetta & Romain Ranciere & Kenneth Rogoff, 2006. "Exchange Rate Volatility and Productivity Growth: The Role of Financial Development," Working Papers, Swiss National Bank, Study Center Gerzensee 06.02, Swiss National Bank, Study Center Gerzensee.
  8. Michael J. Dueker & Andreas M. Fischer, 2006. "Do inflation targeters outperform non-targeters?," Review, Federal Reserve Bank of St. Louis, Federal Reserve Bank of St. Louis, issue Sep, pages 431-450.
  9. Joshua Aizenman & Daniel Riera-Crichton, 2006. "Real Exchange Rate and International Reserves in the Era of Growing Financial and Trade Integration," NBER Working Papers, National Bureau of Economic Research, Inc 12363, National Bureau of Economic Research, Inc.
  10. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2006. "Does Inflation Targeting Make a Difference?," Working Papers, Czech National Bank, Research Department 2006/13, Czech National Bank, Research Department.
  11. Sebastian Edwards, 2006. "The Relationship Between Exchange Rates and Inflation Targeting Revisited," Working Papers Central Bank of Chile, Central Bank of Chile 409, Central Bank of Chile.
  12. Reinhart, Carmen & Calvo, Guillermo, 2002. "Fear of floating," MPRA Paper, University Library of Munich, Germany 14000, University Library of Munich, Germany.
  13. Frederic S. Mishkin & Klaus Schmidt-Hebbel D., 2006. "Monetary Policy Under Inflation Targeting: An Introduction," Journal Economía Chilena (The Chilean Economy), Central Bank of Chile, Central Bank of Chile, vol. 9(3), pages 5-17, December.
  14. Judson, Ruth A. & Owen, Ann L., 1999. "Estimating dynamic panel data models: a guide for macroeconomists," Economics Letters, Elsevier, Elsevier, vol. 65(1), pages 9-15, October.
  15. Richard Dennis, 2003. "Exploring the Role of the Real Exchange Rate in Australian Monetary Policy," The Economic Record, The Economic Society of Australia, The Economic Society of Australia, vol. 79(244), pages 20-38, 03.
  16. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers, National Bureau of Economic Research, Inc 6254, National Bureau of Economic Research, Inc.
  17. Aizenman, Joshua & Hutchison, Michael M. & Noy, Ilan, 2008. "Inflation Targeting and Real Exchange Rates in Emerging Markets," Santa Cruz Department of Economics, Working Paper Series, Department of Economics, UC Santa Cruz qt6d23q90v, Department of Economics, UC Santa Cruz.
  18. 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.
  19. Pavasuthipaisit, Robert, 2010. "Should inflation-targeting central banks respond to exchange rate movements?," Journal of International Money and Finance, Elsevier, Elsevier, vol. 29(3), pages 460-485, April.
  20. Clarida, Richard H, 2001. "The Empirics of Monetary Policy Rules in Open Economies," International Journal of Finance & Economics, John Wiley & Sons, Ltd., John Wiley & Sons, Ltd., vol. 6(4), pages 315-23, October.
  21. Arminio Fraga & Ilan Goldfajn & André Minella, 2003. "Inflation Targeting in Emerging Market Economies," Working Papers Series, Central Bank of Brazil, Research Department 76, Central Bank of Brazil, Research Department.
  22. 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.
  23. Amato, Jeffery D. & Gerlach, Stefan, 2001. "Inflation Targeting in Emerging Market and Transition Economies: Lessons After a Decade," CEPR Discussion Papers, C.E.P.R. Discussion Papers 3074, C.E.P.R. Discussion Papers.
  24. Love, Inessa & Zicchino, Lea, 2006. "Financial development and dynamic investment behavior: Evidence from panel VAR," The Quarterly Review of Economics and Finance, Elsevier, Elsevier, vol. 46(2), pages 190-210, May.
  25. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, American Economic Association, vol. 91(2), pages 263-267, May.
  26. Joshua Aizenman, 2007. "International Reserves Management and the Current Account," Working Papers Central Bank of Chile, Central Bank of Chile 449, Central Bank of Chile.
  27. 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.
  28. Eichengreen, Barry, 2007. "Comment on Cheung, Chinn and Fujii, "The Overvaluation of Renminbi Undervaluation"," Journal of International Money and Finance, Elsevier, Elsevier, vol. 26(5), pages 786-787, September.
  29. M. S. Mohanty & Marc Klau, 2004. "Monetary policy rules in emerging market economies: issues and evidence," BIS Working Papers, Bank for International Settlements 149, Bank for International Settlements.
  30. 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.
  31. Beck , Thorsten & Demirguc-Kunt, Asli & Levine, Ross, 2009. "Financial institutions and markets across countries and over time - data and analysis," Policy Research Working Paper Series, The World Bank 4943, The World Bank.
  32. William B. English & William R. Nelson & Brian P. Sack, 2002. "Interpreting the significance of lagged interest rate in estimated monetary policy rules," Finance and Economics Discussion Series, Board of Governors of the Federal Reserve System (U.S.) 2002-24, Board of Governors of the Federal Reserve System (U.S.).
  33. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers, National Bureau of Economic Research, Inc 10646, National Bureau of Economic Research, Inc.
  34. Klaus Schmidt-Hebbel & Alejandro Werner, 2002. "Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate," Working Papers Central Bank of Chile, Central Bank of Chile 171, Central Bank of Chile.
  35. Levin, Andrew & Lin, Chien-Fu & James Chu, Chia-Shang, 2002. "Unit root tests in panel data: asymptotic and finite-sample properties," Journal of Econometrics, Elsevier, Elsevier, vol. 108(1), pages 1-24, May.
  36. Mitchell A. Petersen, 2009. "Estimating Standard Errors in Finance Panel Data Sets: Comparing Approaches," Review of Financial Studies, Society for Financial Studies, Society for Financial Studies, vol. 22(1), pages 435-480, January.
  37. de Mello, Luiz & Moccero, Diego, 2011. "Monetary policy and macroeconomic stability in Latin America: The cases of Brazil, Chile, Colombia and Mexico," Journal of International Money and Finance, Elsevier, Elsevier, vol. 30(1), pages 229-245, February.
  38. Thomas Lubik & Frank Schorfheide, 2003. "Do Central Banks Respond to Exchange Rate Movements? A Structural Investigation," Economics Working Paper Archive, The Johns Hopkins University,Department of Economics 505, The Johns Hopkins University,Department of Economics.
  39. Wollmershäuser, Timo, 2006. "Should central banks react to exchange rate movements? An analysis of the robustness of simple policy rules under exchange rate uncertainty," Munich Reprints in Economics, University of Munich, Department of Economics 19716, University of Munich, Department of Economics.
  40. Ball, Christopher P. & Reyes, Javier, 2008. "Inflation targeting or fear of floating in disguise? A broader perspective," Journal of Macroeconomics, Elsevier, Elsevier, vol. 30(1), pages 308-326, March.
  41. Johnson, David R., 2002. "The effect of inflation targeting on the behavior of expected inflation: evidence from an 11 country panel," Journal of Monetary Economics, Elsevier, Elsevier, vol. 49(8), pages 1521-1538, November.
  42. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers, National Bureau of Economic Research, Inc 8604, National Bureau of Economic Research, Inc.
  43. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 39(1), pages 195-214, December.
  44. Javier Reyes, 2007. "Exchange Rate Passthrough Effects and Inflation Targeting in Emerging Economies: What is the Relationship?," Review of International Economics, Wiley Blackwell, Wiley Blackwell, vol. 15(3), pages 538-559, 08.
  45. 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.
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:
This item has more than 25 citations. To prevent cluttering this page, these citations are listed on a separate page.

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:cdl:ucscec:qt6d23q90v. 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: (Lisa Schiff).

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.