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Inflation Targeting and Real Exchange Rates in Emerging Markets

  • Joshua Aizenman
  • Michael Hutchison
  • Ilan Noy

We investigate inflation targeting (IT) in emerging markets, focusing on the role of the real exchange rate and the distinction between commodity and non-commodity exporters. IT emerging markets appear to follow a "mixed strategy" whereby both inflation and real exchange rates are important determinants of policy interest rates. The response to real exchange rates, however, is more constrained than in non-IT regimes. We also find that the response to real exchange rates is strongest in those countries following IT policies that are relatively intensive in exporting basic commodities; and present a theoretical model that explains these empirical results.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 14561.

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Date of creation: Dec 2008
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Publication status: published as Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.
Handle: RePEc:nbr:nberwo:14561
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