"Ex-ante" Taylor rules and expectation forming in emerging markets

The success of monetary policy in stabilizing inflation depends substantially on its influence on expectation formation of private agents. This paper provides a novel perspective on the expectation forming process of financial markets. Using forecasts for the short-term interest rate, the inflation rate, and output growth for 10 emerging markets in Latin-America, central and eastern Europe, we estimate expected ("ex-ante") Taylor-type rules. We find evidence for significant differences in the expectation formation process in the sense that the well-known Taylor principle fairly holds for only some countries, while for the other countries it does not. The adaption of an explicit inflation targeting regime seems to explain this cross-country differences.