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Exchange rate regimes and real exchange rate volatility: Does inflation targeting help or hurt?

Listed author(s):
  • Ouyang, Alice Y.
  • Rajan, Ramkishen S.
  • Li, Jie

This paper revisits the comparison of the effects of inflation targeters versus hard fixers and intermediate exchange rate regimes. In particular, we are interested in exploring the impact of inflation targeting (IT) on real effective exchange rate (REER) volatility for a panel of 62 developing countries over the period 2006–2012. We also analyze the impact of IT regimes on REER in terms of its two component parts, i.e. relative tradable prices across countries as well as sectoral prices of tradables and nontradables within countries. The paper accounts for self-selection concerns regarding policy adoption and examines the effects of commodity exports and foreign exchange intervention. Notably, IT regimes seem to have experienced greater REER volatility, largely driven by external prices in developed countries. For developing countries, IT regimes show no difference in REER volatility, though there is some evidence that they have lower volatility in internal prices.

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File URL: http://www.sciencedirect.com/science/article/pii/S0922142516300184
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Article provided by Elsevier in its journal Japan and the World Economy.

Volume (Year): 39 (2016)
Issue (Month): C ()
Pages: 62-72

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Handle: RePEc:eee:japwor:v:39:y:2016:i:c:p:62-72
DOI: 10.1016/j.japwor.2016.07.002
Contact details of provider: Web page: http://www.elsevier.com/locate/inca/505557

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  1. Shu Lin, 2010. "On the International Effects of Inflation Targeting," The Review of Economics and Statistics, MIT Press, vol. 92(1), pages 195-199, February.
  2. Mishkin, Frederic S., 1998. "International Experiences With Different Monetary Policy Regimes," Seminar Papers 648, Stockholm University, Institute for International Economic Studies.
  3. Ouyang, Alice Y. & Rajan, Ramkishen S., 2013. "Real exchange rate fluctuations and the relative importance of nontradables," Journal of International Money and Finance, Elsevier, vol. 32(C), pages 844-855.
  4. Charles Engel, 1999. "Accounting for U.S. Real Exchange Rate Changes," Journal of Political Economy, University of Chicago Press, vol. 107(3), pages 507-538, June.
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  16. Carlos Eduardo S. Gonçalves & Alexandre Carvalho, 2009. "Inflation Targeting Matters: Evidence from OECD Economies' Sacrifice Ratios," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 41(1), pages 233-243, February.
  17. Carl E. Walsh, 2009. "Inflation Targeting: What Have We Learned?," International Finance, Wiley Blackwell, vol. 12(2), pages 195-233, August.
  18. Mussa, Michael, 1986. "Nominal exchange rate regimes and the behavior of real exchange rates: Evidence and implications," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 25(1), pages 117-214, January.
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