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Inflation Targeting, Exchange Rate Pass-Through and 'Fear of Floating'

  • Reginaldo P. Nogueira Jnr

    ()

The paper presents evidence on exchange rate pass-through and the "Fear of Floating" hypothesis before and after Inflation Targeting for a set of developed and emerging market economies. We use a structural VAR model to estimate the effect of depreciations on prices. The results support the view of the previous literature that the pass-through is higher for emerging than for developed economies, and that it has decreased after the adoption of Inflation Targeting. We then use several different methodologies to examine the existence of "Fear of Floating" practices. We observe a drastic reduction in direct foreign exchange market intervention after the adoption of Inflation Targeting. As the exchange rate pass-through still matters for the attainment of the inflation targets, "Fear of Floating" seems to play only a minor role for most economies in our sample.

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Paper provided by School of Economics, University of Kent in its series Studies in Economics with number 0605.

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Date of creation: Sep 2006
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Handle: RePEc:ukc:ukcedp:0605
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  19. Christopher P. Ball & Javier Reyes, 2004. "Inflation targeting or fear of floating in disguise: the case of Mexico," International Journal of Finance & Economics, John Wiley & Sons, Ltd., vol. 9(1), pages 49-69.
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  21. Minella, Andre & de Freitas, Paulo Springer & Goldfajn, Ilan & Muinhos, Marcelo Kfoury, 2003. "Inflation targeting in Brazil: constructing credibility under exchange rate volatility," Journal of International Money and Finance, Elsevier, vol. 22(7), pages 1015-1040, December.
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  24. Campa, José Manuel & Goldberg, Linda S., 2004. "Exchange Rate Pass-Through into Import Prices," CEPR Discussion Papers 4391, C.E.P.R. Discussion Papers.
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  26. Joel Bogdanski & Alexandre Antonio Tombini & Sérgio Ribeiro da Costa Werlang, 2000. "Implementing Inflation Targeting in Brazil," Working Papers Series 1, Central Bank of Brazil, Research Department.
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  28. Dalia S Hakura, 2005. "Are Emerging Market Countries Learning to Float?," IMF Working Papers 05/98, International Monetary Fund.
  29. Reginaldo P. Nogueira Jnr, 2006. "Inflation Targeting and the Role of Exchange Rate Pass-through," Studies in Economics 0602, School of Economics, University of Kent.
  30. Armando Baqueiro & Alejandro Diaz de Leon & Alberto Torres, 2003. "Fear of floating or fear of inflation? The role of the exchange rate pass-through," BIS Papers chapters, in: Bank for International Settlements (ed.), Monetary policy in a changing environment, volume 19, pages 338-354 Bank for International Settlements.
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