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Should inflation-targeting central banks respond to exchange rate movements?

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  • Pavasuthipaisit, Robert

Abstract

This paper examines whether it is optimal for inflation-targeting central banks to respond to exchange-rate movements. The paper finds that exchange-rate movements can provide a signal on the developments in the economy that the central bank cannot perfectly observe. The results suggest that when the degrees of exchange-rate pass-through and international financial integration are high, it is optimal for the central bank to pay more attentions to exchange-rate movements. These results however depend on two conditions: 1) the ability of the central bank to observe the true exchange-rate process and 2) the number of real frictions in the model economy.

Suggested Citation

  • Pavasuthipaisit, Robert, 2010. "Should inflation-targeting central banks respond to exchange rate movements?," Journal of International Money and Finance, Elsevier, vol. 29(3), pages 460-485, April.
  • Handle: RePEc:eee:jimfin:v:29:y:2010:i:3:p:460-485
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    References listed on IDEAS

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    Citations

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    Cited by:

    1. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
    2. repec:hal:journl:halshs-00881359 is not listed on IDEAS
    3. Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
    4. repec:eee:jimfin:v:74:y:2017:i:c:p:31-52 is not listed on IDEAS
    5. Cabral,Rene & Carneiro,Francisco Galrao & Mollick,Andre Varella, 2016. "Inflation targeting and exchange rate volatility in emerging markets," Policy Research Working Paper Series 7712, The World Bank.
    6. César Calderón & Roberto Duncan & Klaus Schmidt-Hebbel, 2016. "Do Good Institutions Promote Countercyclical Macroeconomic Policies?," Oxford Bulletin of Economics and Statistics, Department of Economics, University of Oxford, vol. 78(5), pages 650-670, October.
    7. Alessandra Pasqualina Viola & Marcelo Cabus Klotzle & Antonio Carlos Figueiredo Pinto & Wagner Piazza Gaglianone, 2017. "Predicting Exchange Rate Volatility in Brazil: an approach using quantile autoregression," Working Papers Series 466, Central Bank of Brazil, Research Department.
    8. Mauricio Lopera & Ramón Javier Mesa & Charle Londoño, 2014. "Evaluando las intervenciones cambiarias en Colombia: 2004-2012," ESTUDIOS GERENCIALES, UNIVERSIDAD ICESI, March.

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