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What to Target? Inflation or Exchange Rate

  • Shu Lin

    ()

    (School of Economics, Fudan University, 600 Guoquan Road, Shanghai 200433, China; shulin75@gmail.com; corresponding author)

  • Haichun Ye

    ()

    (School of Economics, Shanghai University of Finance and Economics, 777 Guoding Road, Shanghai 200433, China)

This study empirically compares, for the first time, the popular exchange-rate–targeting regime with the recently emerged inflation-targeting framework in developing countries. Applying a variety of propensity score matching methods and dynamic panel generalized method of moments (GMM) regressions to a sample of 50 developing countries for the years 1990–2006, we find strong and robust evidence that, compared to exchange-rate targeting, inflation targeting leads to a significantly lower inflation rate, and the lower inflation rate does not come at a cost of slower growth.

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File URL: http://dx.doi.org/10.4284/0038-4038-78.4.1202
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Article provided by Southern Economic Association in its journal Southern Economic Journal.

Volume (Year): 78 (2012)
Issue (Month): 4 (April)
Pages: 1202-1221

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Handle: RePEc:sej:ancoec:v:78:4:y:2012:p:1202-1221
Contact details of provider: Web page: http://www.southerneconomic.org/

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  1. Carlos Capistrán & Manuel Ramos-Francia, 2010. "Does Inflation Targeting Affect the Dispersion of Inflation Expectations?," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 42(1), pages 113-134, 02.
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  14. Axel Dreher & Jan-Egbert Sturm & Jakob de Haan, 2007. "Does High Inflation Cause Central Bankers to Lose Their Job? Evidence Based on a New Data Set," KOF Working papers 07-167, KOF Swiss Economic Institute, ETH Zurich.
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  17. Manuel Arellano & Stephen Bond, 1991. "Some Tests of Specification for Panel Data: Monte Carlo Evidence and an Application to Employment Equations," Review of Economic Studies, Oxford University Press, vol. 58(2), pages 277-297.
  18. 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, 02.
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