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Inflation Targeting by Debtor Central Banks in Emerging Market Economies

  • Axel Löffler
  • Gunther Schnabl
  • Franziska Schobert

Given buoyant capital inflows and managed exchange rates the majority of emerging market central banks have continued to accumulate massive foreign reserves. If left unsterilized, the liquidity expansion can threaten domestic macroeconomic stability. To contain domestic inflation these central banks absorb rather then provide liquidity in their regular monetary policy operations. Based on an augmented Barro-Gordon framework we show that inflation targeting within an environment of surplus liquidity is less efficient, because absorbing liquidity raises the costs of monetary policy operations. By implementing sterilization costs into the central bank’s objective function the inflation bias increases.

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Paper provided by CESifo Group Munich in its series CESifo Working Paper Series with number 3138.

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Date of creation: 2010
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Handle: RePEc:ces:ceswps:_3138
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  1. Arminio Fraga & Ilan Goldfajn & Andre Minella, 2003. "Inflation Targeting in Emerging Market Economies," NBER Working Papers 10019, National Bureau of Economic Research, Inc.
  2. Gunther Schnabl & Franziska Schobert, 2009. "Global Asymmetries In Monetary Policy Operations: Debtor Central Banks Of The Mena Region," Manchester School, University of Manchester, vol. 77(s1), pages 85-107, 09.
  3. Bennett T. McCallum, 1996. "Inflation Targeting in Canada, New Zealand, Sweden, the United Kingdom, and in General," NBER Working Papers 5579, National Bureau of Economic Research, Inc.
  4. Guillermo Calvo & Frederic S. Mishkin, 2003. "The Mirage of Exchange Rate Regimes for Emerging Market Countries," NBER Working Papers 9808, National Bureau of Economic Research, Inc.
  5. Ronald McKinnon & Gunther Schnabl, 2009. "China's financial conundrum and global imbalances," BIS Working Papers 277, Bank for International Settlements.
  6. Frederic S. Mishkin, 2004. "Can Inflation Targeting Work in Emerging Market Countries?," NBER Working Papers 10646, National Bureau of Economic Research, Inc.
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