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Inflation targeting or Exchange Rate Targeting: Which Framework Supports The Goal of Price Stability in Emerging Market Economics?

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  • Nora Abu Asab

    (Department of Economics, University of Sheffield)

  • Juan Carlos Cuestas

    (Department of Economics, University of Sheffield)

  • Alberto Montagnoli

    (Department of Economics, University of Sheffield)

Abstract

We investigate the relationship between inflation and inflation uncertainty under inflation targeting and a conventional fixed exchange rate system and the impact of each regime on inflation and inflation uncertainty over the span from 1980:01 to 2014:06. The results from GARCH in mean models reveal that, under the two monetary regimes, inflation increases inflation uncertainty and inflation uncertainty raises inflation. This positive bi-directional relationship between inflation and inflation uncertainty provides evidence of the importance of non-discretionary monetary policies. Both regimes appear effective in reducing inflation uncertainty in the long-run which suggests the importance of monetary regimes as signalling devices for inflation expectations. The fixed exchange rate regime has no impact on average inflation and inflation inertia, while inflation targeting has been successful at lowering average inflation and inflation persistence of its followers. Nevertheless, the results provide evidence that inflation targeting countries have not benefited equally from inflation targeting.

Suggested Citation

  • Nora Abu Asab & Juan Carlos Cuestas & Alberto Montagnoli, 2015. "Inflation targeting or Exchange Rate Targeting: Which Framework Supports The Goal of Price Stability in Emerging Market Economics?," Working Papers 2015025, The University of Sheffield, Department of Economics.
  • Handle: RePEc:shf:wpaper:2015025
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    File URL: http://www.sheffield.ac.uk/economics/research/serps/articles/2015_025
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    1. Borivoje Krušković, 2020. "Exchange Rate Targeting Versus Inflation Targeting: Empirical Analysis of the Impact on Employment and Economic Growth," Journal of Central Banking Theory and Practice, Central bank of Montenegro, vol. 9(2), pages 67-85.

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    More about this item

    Keywords

    Inflation Targeting; Fixed Exchange Rate System; GARCH; Monetary Policy; Price Stability;
    All these keywords.

    JEL classification:

    • C54 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Quantitative Policy Modeling
    • C58 - Mathematical and Quantitative Methods - - Econometric Modeling - - - Financial Econometrics
    • E50 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - General
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies

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