We investigate how monetary authorities have implemented inflation targeting (IT) policy regimes in emerging market economies, focusing especially on the roles of the real exchange rate and the distinction between commodity and non-commodity exporting nations. We estimate a dynamic model with panel data and fixed effects for 17 emerging markets using both IT and non-IT observations to determine differences in policy behavior. 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. Importantly, IT emerging markets appear to 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 the real exchange rate. 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 these empirical results.
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
14561.
Length: Date of creation: Dec 2008 Date of revision: Handle: RePEc:nbr:nberwo:14561
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies F15 - International Economics - - Trade - - - Economic Integration F3 - International Economics - - International Finance
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