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Inflation Targeting and the Forward Bias Puzzle in Emerging Countries

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  • Dramane Coulibaly
  • Hubert Kempf

Abstract

Based on quarterly data on 31 emerging countries (among which 16 are inflation targeting countries) from 1990Q1 to 2014Q3, we obtain a strong support for the conjecture that the implementation of inflation targeting weakens the Fisherian relation between expected depreciation and the interest rate differential (uncovered interest parity condition) and thus is conducive to the appearance of the forward bias puzzle in emerging countries. We show that this reects the performance of inflation targeting regimes in lowering the level and volatility of inflation which leads non-Fisherian fundamentals to be predominant. Our finding holds when controlling for country-specific effects, time-specific effects, global disinflationation, exchange rate management and using different econometric techniques.

Suggested Citation

  • Dramane Coulibaly & Hubert Kempf, 2017. "Inflation Targeting and the Forward Bias Puzzle in Emerging Countries," EconomiX Working Papers 2017-12, University of Paris Nanterre, EconomiX.
  • Handle: RePEc:drm:wpaper:2017-12
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    References listed on IDEAS

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    More about this item

    Keywords

    Inflation targeting; uncovered interest parity; forward bias puzzle; emerging countries.;

    JEL classification:

    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • F31 - International Economics - - International Finance - - - Foreign Exchange

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