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The Effects of Inflation Targeting on the Current Account: An Empirical Examination

Author

Listed:
  • Cesar R Sobrino

    (Universidad del Turabo)

Abstract

Empirical studies have found that inflation targeting leads to a fall in real interest rate, macroeconomic uncertainty, exchange rate volatility, and output volatility. Economic theory suggests that those elements should lead to a rise in investment and a fall in private savings. However, Rose (2007) reports very little association between current account and inflation targeting. This paper examines the effect of inflation targeting on current account. The results show that, consistent with economic theory, inflation targeting does negatively affect current account once global shocks have been properly accounted for. This evidence implies that exchange rate and balance of payment crises should not lead inflation targeting per se.

Suggested Citation

  • Cesar R Sobrino, 2010. "The Effects of Inflation Targeting on the Current Account: An Empirical Examination," Economics Bulletin, AccessEcon, vol. 30(2), pages 1105-1112.
    • Handle: RePEc:ebl:ecbull:eb-09-00414
    as

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    References listed on IDEAS

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    1. Geraats, P. & Eijffinger, S.C.W. & van der Cruijsen, C.A.B., 2006. "Does Central Bank Transparancy Reduce Interest Rates?," Discussion Paper 2006-11, Tilburg University, Center for Economic Research.
    2. Ghosh, Atish R. & Ostry, Jonathan D., 1997. "Macroeconomic uncertainty, precautionary saving, and the current account," Journal of Monetary Economics, Elsevier, vol. 40(1), pages 121-139, September.
    3. Calderon Cesar Augusto & Chong Alberto & Loayza Norman V., 2002. "Determinants of Current Account Deficits in Developing Countries," The B.E. Journal of Macroeconomics, De Gruyter, vol. 2(1), pages 1-33, March.
    4. Klaus Schmidt-Hebbel & Alejandro M. Werner, 2002. "Inflation Targeting in Brazil, Chile, and Mexico: Performance, Credibility, and the Exchange Rate," Economía Journal, The Latin American and Caribbean Economic Association - LACEA, vol. 0(Spring 20), pages 31-90, January.
    5. Manfred J. M. Neumann & Jurgen Von Hagen, 2002. "Does inflation targeting matter?," Review, Federal Reserve Bank of St. Louis, vol. 84(Jul), pages 127-148.
    6. Guillermo A. Calvo & Carmen M. Reinhart, 2002. "Fear of Floating," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 117(2), pages 379-408.
    7. Rose, Andrew K., 2007. "A stable international monetary system emerges: Inflation targeting is Bretton Woods, reversed," Journal of International Money and Finance, Elsevier, vol. 26(5), pages 663-681, September.
    8. Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Inflation Targeting in Latin America," Working Papers Central Bank of Chile 105, Central Bank of Chile.
    9. Leiderman, Leonardo & Maino, Rodolfo & Parrado, Eric, 2006. "Inflation Targeting in Dollarized Economies," Foerder Institute for Economic Research Working Papers 275699, Tel-Aviv University > Foerder Institute for Economic Research.
    10. Thorarinn G. Petursson, 2005. "Inflation Targeting and its Effects on Macroeconomic Performance," SUERF Studies, SUERF - The European Money and Finance Forum, number 2005/5 edited by Morten Balling, May.
    11. Andrew T. Levin & Fabio M. Natalucci & Jeremy M. Piger, 2004. "The macroeconomic effects of inflation targeting," Review, Federal Reserve Bank of St. Louis, vol. 86(Jul), pages 51-80.
    12. Chinn, Menzie D. & Prasad, Eswar S., 2003. "Medium-term determinants of current accounts in industrial and developing countries: an empirical exploration," Journal of International Economics, Elsevier, vol. 59(1), pages 47-76, January.
    13. Levin, Andrew & Gürkaynak, Refet & Swanson, Eric T., 2006. "Does Inflation Targeting Anchor Long-Run Inflation Expectations? Evidence from Long-Term Bond Yields in the US, UK and Sweden," CEPR Discussion Papers 5808, C.E.P.R. Discussion Papers.
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    Cited by:

    1. YUAN, Chunming & CHEN, Ruo, 2015. "Policy transmissions, external imbalances, and their impacts: Cross-country evidence from BRICS," China Economic Review, Elsevier, vol. 33(C), pages 1-24.
    2. Mishra, Akanksha & Dubey, Amlendu, 2022. "Inflation targeting and its spillover effects on financial stability in emerging market economies," Journal of Policy Modeling, Elsevier, vol. 44(6), pages 1198-1218.
    3. Mohd. FAYAZ & Kaur Bhatia SANDEEP, 2016. "Trends , Patterns and Determinants of Indian Current Account Deficit," Applied Econometrics and International Development, Euro-American Association of Economic Development, vol. 16(1).

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    More about this item

    Keywords

    Current Account; Inflation Targeting; Panel Data;
    All these keywords.

    JEL classification:

    • F3 - International Economics - - International Finance
    • C3 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables

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