IDEAS home Printed from https://ideas.repec.org/a/mof/journl/ppr20_02_05.html
   My bibliography  Save this article

Exchange Rate Regimes and Economic Stability of Emerging Economies:The Role of Inflation Targeting

Author

Listed:
  • Shin-ichi Fukuda

    (Professor, Graduate School of Economics, The University of Tokyo)

Abstract

The potential growth rates of emerging economies are much larger than those of developed economies. However, many emerging economies have vulnerable economic fundamentals and have frequently experienced severe economic crises in the past. As a result, making their local currencies credible and realizing sustainable growth have been significant priorities for many emerging economies. This paper analyzes what impacts the choice of the exchange rate regime had on macroeconomic performance of emerging economies using the panel data from the second half of the 2000s. In the analysis, we focus not only on the effects of traditional exchange rate regimes such as the floating and fixed exchange rate regimes, but also on those of inflation targeting and anchored exchange rate regimes. We explore their effects on the three macroeconomic performance indicators: economic growth rate, exchange rate depreciation, and inflation rate. The analysis revealed that the fixed exchange rate and anchored exchange rate regimes mitigated the exchange rate depreciation and the inflation rate but decreased economic growth in emerging economies. On the other hand, the inflation targeting regime not only sustained economic growth as the floating exchange rate regime did, but also mitigated the exchange rate depreciation and the inflation rate as the fixed exchange rate regime did. This result shows that emerging economies adopting the inflation targeting could achieve high economic growth by maintaining flexibility in monetary policy as countries with floating exchange rates did. At the same time, they could achieve a stable inflation rate as countries with fixed exchange rates did. However, if we were to look at the short-run effects of introducing the inflation targeting, the results suggested that although the inflation targeting was effective in promoting growth, it was not effective in controlling inflation rates. Additionally, while the inflation targeting regime could stabilize short-term volatility of growth rates to some extent, no significant effects were observed in stabilizing exchange rate and inflation rate volatilities.

Suggested Citation

  • Shin-ichi Fukuda, 2024. "Exchange Rate Regimes and Economic Stability of Emerging Economies:The Role of Inflation Targeting," Public Policy Review, Policy Research Institute, Ministry of Finance Japan, vol. 20(1), pages 1-21, February.
    • Handle: RePEc:mof:journl:ppr20_02_05
    DOI: 10.57520/prippr.20-2-5
    as

    Download full text from publisher

    File URL: https://doi.org/10.57520/prippr.20-2-5
    Download Restriction: no
    File URL: https://libkey.io/10.57520/prippr.20-2-5?utm_source=ideas
    LibKey link: if access is restricted and if your library uses this service, LibKey will redirect you to where you can use your library subscription to access this item
    ---><---

    References listed on IDEAS

    as
    1. Tillmann, Peter, 2016. "Unconventional monetary policy and the spillovers to emerging markets," Journal of International Money and Finance, Elsevier, vol. 66(C), pages 136-156.
    2. Carmen M. Reinhart & Kenneth S. Rogoff, 2004. "The Modern History of Exchange Rate Arrangements: A Reinterpretation," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 119(1), pages 1-48.
    3. Mr. Christian H Ebeke & Mr. Armand P Fouejieu, 2015. "Inflation Targeting and Exchange Rate Regimes in Emerging Markets," IMF Working Papers 2015/228, International Monetary Fund.
    4. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," Central Banking, Analysis, and Economic Policies Book Series, in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.),Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 9, pages 291-372, Central Bank of Chile.
    5. Annamaria Kokenyne & Mr. Romain M Veyrune & Mr. Karl F Habermeier & Mr. Harald J Anderson, 2009. "Revised System for the Classification of Exchange Rate Arrangements," IMF Working Papers 2009/211, International Monetary Fund.
    6. Shin-ichi Fukuda & Mariko Tanaka, 2017. "The Impacts of Emerging Asia on Global Financial Markets," Emerging Markets Finance and Trade, Taylor & Francis Journals, vol. 53(12), pages 2725-2743, December.
    7. Ms. Inci Ötker & Charles Freedman, 2010. "Important Elements for Inflation Targeting for Emerging Economies," IMF Working Papers 2010/113, International Monetary Fund.
    8. Shin-ichi Fukuda & Mariko Tanaka, 2017. "The Impacts of Emerging Asia on Global Financial Markets," CIRJE F-Series CIRJE-F-1050, CIRJE, Faculty of Economics, University of Tokyo.
    9. Kenneth Rogoff, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 100(4), pages 1169-1189.
    10. Goncalves, Carlos Eduardo S. & Salles, Joao M., 2008. "Inflation targeting in emerging economies: What do the data say?," Journal of Development Economics, Elsevier, vol. 85(1-2), pages 312-318, February.
    11. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
    Full references (including those not matched with items on IDEAS)

    Most related items

    These are the items that most often cite the same works as this one and are cited by the same works as this one.
    1. Minea, Alexandru & Tapsoba, René, 2014. "Does inflation targeting improve fiscal discipline?," Journal of International Money and Finance, Elsevier, vol. 40(C), pages 185-203.
    2. Alpanda, Sami & Honig, Adam, 2014. "The impact of central bank independence on the performance of inflation targeting regimes," Journal of International Money and Finance, Elsevier, vol. 44(C), pages 118-135.
    3. Lanzafame, Matteo & Nogueira, Reginaldo, 2013. "Inflation targeting and interest rates," MPRA Paper 46153, University Library of Munich, Germany.
    4. Alexandru Minea & René Tapsoba & Patrick Villieu, 2021. "Inflation targeting adoption and institutional quality: Evidence from developing countries," The World Economy, Wiley Blackwell, vol. 44(7), pages 2107-2127, July.
    5. Atsuyoshi Morozumi & Michael Bleaney & Zakari Mumuni, 2020. "Inflation targeting in low‐income countries: Does IT work?," Review of Development Economics, Wiley Blackwell, vol. 24(4), pages 1529-1550, November.
    6. López-Villavicencio, Antonia & Pourroy, Marc, 2019. "Does inflation targeting always matter for the ERPT? A robust approach," Journal of Macroeconomics, Elsevier, vol. 60(C), pages 360-377.
    7. Lin, Hsin-Yi, 2016. "Do quantitative monetary targets matter?," International Review of Economics & Finance, Elsevier, vol. 43(C), pages 415-428.
    8. de Mendonça, Helder Ferreira & de Guimarães e Souza, Gustavo José, 2012. "Is inflation targeting a good remedy to control inflation?," Journal of Development Economics, Elsevier, vol. 98(2), pages 178-191.
    9. Soe, Than Than & Kakinaka, Makoto, 2018. "Inflation targeting and income velocity in developing economies: Some international evidence," The North American Journal of Economics and Finance, Elsevier, vol. 44(C), pages 44-61.
    10. Huang, Ho-Chuan & Yeh, Chih-Chuan & Wang, Xiuhua, 2019. "Inflation targeting and output-inflation tradeoffs," Journal of International Money and Finance, Elsevier, vol. 96(C), pages 102-120.
    11. Garriga, Ana Carolina & Rodriguez, Cesar M., 2023. "Central bank independence and inflation volatility in developing countries," Economic Analysis and Policy, Elsevier, vol. 78(C), pages 1320-1341.
    12. Zafar Hayat & Saher Masood, 2022. "Inflation Targeting Skepticism: Myth or Reality? A Way Forward for Pakistan (Article)," The Pakistan Development Review, Pakistan Institute of Development Economics, vol. 61(1), pages 1-27.
    13. Jean‐Louis Combes & Xavier Debrun & Alexandru Minea & René Tapsoba, 2018. "Inflation Targeting, Fiscal Rules and the Policy Mix: Cross‐effects and Interactions," Economic Journal, Royal Economic Society, vol. 128(615), pages 2755-2784, November.
    14. Shu Lin & Haichun Ye, 2013. "Does Inflation Targeting Help Reduce Financial Dollarization?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 45(7), pages 1253-1274, October.
    15. Antonia López-Villavicencio & Marc Pourroy, 2017. "IT Countries: A Breed Apart? the case of Exchange Rate Pass-Through," Working Papers 1728, Groupe d'Analyse et de Théorie Economique Lyon St-Étienne (GATE Lyon St-Étienne), Université de Lyon.
    16. Coulibaly, Dramane & Kempf, Hubert, 2019. "Inflation targeting and the forward bias puzzle in emerging countries," Journal of International Money and Finance, Elsevier, vol. 90(C), pages 19-33.
    17. Adina Ionela Străchinaru & Bogdan Andrei Dumitrescu, 2019. "Assessing the Sustainability of Inflation Targeting: Evidence from EU Countries with Non-EURO Currencies," Sustainability, MDPI, vol. 11(20), pages 1-13, October.
    18. René TAPSOBA & Alexandru MINEA & Jean-Louis COMBES, 2012. "Inflation Targeting and Fiscal Rules: Do Interactions and Sequence of Adoption Matter?," Working Papers 201223, CERDI.
    19. Jung, Alexander & Romelli, Davide & Farvaque, Etienne, 2025. "Do central bank reforms lead to more monetary discipline?," Working Paper Series 3049, European Central Bank.
    20. Philipp F. M. Baumann & Enzo Rossi & Alexander Volkmann, 2020. "What Drives Inflation and How: Evidence from Additive Mixed Models Selected by cAIC," Papers 2006.06274, arXiv.org, revised Aug 2022.

    More about this item

    Keywords

    ;
    ;
    ;

    JEL classification:

    • F30 - International Economics - - International Finance - - - General
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • F33 - International Economics - - International Finance - - - International Monetary Arrangements and Institutions
    • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:mof:journl:ppr20_02_05. See general information about how to correct material in RePEc.

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    If CitEc recognized a bibliographic reference but did not link an item in RePEc to it, you can help with this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: Policy Research Institute (email available below). General contact details of provider: https://edirc.repec.org/data/prigvjp.html .

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service. RePEc uses bibliographic data supplied by the respective publishers.