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Terms of Trade Shocks and Inflation Targeting in Emerging Market Economies

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  • Seedwell Hove
  • Albert Touna Mama
  • Fulbert Tchana Tchana

Abstract

Emerging market economies (EMEs) have persistently experienced different waves of commodity terms of trade disturbances, generating macroeconomic instabilities. The adoption of in‡flation targeting (IT) by many emerging market economies has raised the questions about its relative suitability in dealing with these shocks compared with other regimes. This paper tests the robustness of infl‡ation targeting compared to monetary targeting and exchange rate targeting regimes in coping with commodity terms of trade shocks. It uses a panel VAR technique to analyse in a comparative framework, aggregate impulse response functions and variance decompositions of variables to commodity terms of trade shocks. The results show that in general, IT countries respond better to commodity terms of trade shocks especially with respect to infl‡ation and output gap. However, exchange rates are more volatile in IT countries than in exchange rate targeting countries. The results suggest that EMEs countries can reduce the adverse effects of commodity terms of trade fluctuations when they adopt in‡ation targeting, but they also need to pay attention to exchange rate movements.

Suggested Citation

  • Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2012. "Terms of Trade Shocks and Inflation Targeting in Emerging Market Economies," Working Papers 273, Economic Research Southern Africa.
  • Handle: RePEc:rza:wpaper:273
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    Cited by:

    1. Kiran Ijaz & Muhammad Zakaria & Bashir A. Fida, 2014. "Terms-of-Trade Volatility and Inflation in Pakistan," Lahore Journal of Economics, Department of Economics, The Lahore School of Economics, vol. 19(1), pages 111-132, Jan-June.
    2. Fernando de Menezes Linardi, 2016. "Assessing the Fit of a Small Open-Economy DSGE Model for the Brazilian Economy," Working Papers Series 424, Central Bank of Brazil, Research Department.

    More about this item

    Keywords

    In‡flation targeting; commodity terms of trade shocks; emerging markets; panel VAR.;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation

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