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Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

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Listed author(s):
  • Juan Carlos Berganza

    ()

    (Banco de España)

  • Carmen Broto

    ()

    (Banco de España)

Abstract

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of "strict IT", which imply a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of "flexible IT" by policymakers.

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File Function: First version, April 2011
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Paper provided by Banco de España & Working Papers Homepage in its series Working Papers with number 1105.

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Length: 37 pages
Date of creation: Apr 2011
Handle: RePEc:bde:wpaper:1105
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Keywords: inflation targeting; exchange rate volatility; foreign exchange interventions; emerging economies;

Other versions of this item:

Find related papers by JEL classification:
  • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
  • E42 - Macroeconomics and Monetary Economics - - Money and Interest Rates - - - Monetary Sytsems; Standards; Regimes; Government and the Monetary System
  • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
  • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
  • F31 - International Economics - - International Finance - - - Foreign Exchange

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Cited by:

  1. Jaromir Benes & Andrew Berg & Rafael Portillo & David Vavra, 2015. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," Open Economies Review, Springer, vol. 26(1), pages 81-108, February.
  2. 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.
  3. Runchana Pongsaparn & Panda Ketruangroch & Dhanaporn Hirunwong, 2012. "Monetary Policy conduct in Review: The Appropriate Choice of Instruments," Working Papers 2012-05, Monetary Policy Group, Bank of Thailand.
  4. Ouyang, Alice Y. & Rajan, Ramkishen S. & Li, Jie, 2016. "Exchange rate regimes and real exchange rate volatility: Does inflation targeting help or hurt?," Japan and the World Economy, Elsevier, vol. 39(C), pages 62-72.
  5. Grossmann, Axel & Love, Inessa & Orlov, Alexei G., 2014. "The dynamics of exchange rate volatility: A panel VAR approach," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 33(C), pages 1-27.
  6. Vithessonthi, Chaiporn, 2014. "Monetary policy and the first- and second-moment exchange rate change during the global financial crisis: Evidence from Thailand," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 29(C), pages 170-194.
  7. Broto, Carmen, 2013. "The effectiveness of forex interventions in four Latin American countries," Emerging Markets Review, Elsevier, vol. 17(C), pages 224-240.
  8. Marco Airaudo & Edward F Buffie & Luis-Felipe Zanna, 2016. "Inflation Targeting and Exchange Rate Management In Less Developed Countries," IMF Working Papers 16/55, International Monetary Fund.
  9. Roberto Steiner & Adolfo Barajas & César Pabón & Leonardo Villar, 2014. "Singular Focus or Multiple Objectives? What the Data Tell Us about Inflation Targeting in Latin America," ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, ECONOMIA JOURNAL OF THE LATIN AMERICAN AND CARIBBEAN ECONOMIC ASSOCIATION, vol. 0(Fall 2014), pages 177-213, June.
  10. Pablo Pincheira, 2013. "Interventions and inflation expectations in an inflation targeting economy," BIS Working Papers 427, Bank for International Settlements.
  11. Catalán-Herrera, Juan, 2016. "Foreign exchange market interventions under inflation targeting: The case of Guatemala," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 42(C), pages 101-114.
  12. repec:hal:journl:halshs-00881359 is not listed on IDEAS
  13. 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.
  14. Horacio Aguirre & Mauro Alessandro & Lucas Llach, 2016. "The transition to inflation targeting in an emerging economy: selected issues," BIS Papers chapters,in: Bank for International Settlements (ed.), Inflation mechanisms, expectations and monetary policy, volume 89, pages 69-83 Bank for International Settlements.

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