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Inflation Targeting Consequences for Exchange Rates

Author

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  • Paul Beaudry

    (University of British Columbia)

  • Amartya Lahiri

    (University of British Columbia)

Abstract

We uncover a curious data fact. Countries which have switched to inflation targeting have seen their currencies turn into oil currencies with rising oil prices inducing a currency appreciation while in the pre-inflation targeting regime there was no such relationship. Importantly, this data fact holds independent of whether the country is a net oil exporter or importer. We show that one possible explanation for this is that inflation targeting in open economies renders the equilibrium dynamics indeterminate when uncovered interest parity (UIP) does not hold. In such situations, oil prices may well act as a focal point for currency pricing decisions.

Suggested Citation

  • Paul Beaudry & Amartya Lahiri, 2018. "Inflation Targeting Consequences for Exchange Rates," 2018 Meeting Papers 189, Society for Economic Dynamics.
  • Handle: RePEc:red:sed018:189
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    File URL: https://economicdynamics.org/meetpapers/2018/paper_189.pdf
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    1. Meese, Richard A. & Rogoff, Kenneth, 1983. "Empirical exchange rate models of the seventies : Do they fit out of sample?," Journal of International Economics, Elsevier, vol. 14(1-2), pages 3-24, February.
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