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Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating'

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Author Info
Reginaldo P. Nogueira Jnr ()
Abstract

The paper presents evidence on exchange rate pass-through and the "Fear of Floating" hypothesis before and after Inflation Targeting for a set of developed and emerging market economies. We use a structural VAR model to estimate the effect of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. We then use several different methodologies to examine the existence of "Fear of Floating" practices. We observe a drastic reduction in direct foreign exchange market intervention after the adoption of Inflation Targeting. As the exchange rate pass-through still matters for the attainment of the inflation targets, "Fear of Floating" seems to play only a minor role for most economies in our sample.

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Paper provided by Department of Economics, University of Kent in its series Studies in Economics with number 0605.

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Date of creation: Sep 2006
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Handle: RePEc:ukc:ukcedp:0605

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Postal: Department of Economics, University of Kent at Canterbury, Canterbury, Kent, CT2 7NP
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Related research
Keywords: Inflation Targeting; Exchange Rate Pass-Through; 'Fear of Floating';

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Find related papers by JEL classification:
E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
F31 - International Economics - - International Finance - - - Foreign Exchange
F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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  2. 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 171, Central Bank of Chile. [Downloadable!]
  3. Amato, Jeffery D. & Gerlach, Stefan, 2001. "Inflation Targeting in Emerging Market and Transition Economies: Lessons After a Decade," CEPR Discussion Papers 3074, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
    Other versions:
  4. Dalia Hakura, 2005. "Are Emerging Market Countries Learning to Float?," IMF Working Papers 05/98, International Monetary Fund. [Downloadable!]
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  12. 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] b26, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics]. [Downloadable!]
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  15. Hausmann, Ricardo & Panizza, Ugo & Stein, Ernesto, 2001. "Why do countries float the way they float?," Journal of Development Economics, Elsevier, vol. 66(2), pages 387-414, December. [Downloadable!] (restricted)
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  16. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May. [Downloadable!] (restricted)
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  17. Paul R. Masson, 1997. "The Scope for Inflation Targeting in Developing Countries," IMF Working Papers 97/130, International Monetary Fund.
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  20. Fisher, Eric, 1989. "A model of exchange rate pass-through," Journal of International Economics, Elsevier, vol. 26(1-2), pages 119-137, February. [Downloadable!] (restricted)
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    Other versions:
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