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Infation Targeting matters! - Novel evidence from 'ex ante' Taylor rules in emerging markets

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  • Ralf Fendel
  • Michael Frenkel
  • Jan-Christoph Rülke

Abstract

Proponents of infation targeting argue that such a strategy directly infuences expectation formation processes in financial markets. This paper provides a novel test for the evidence that financial market expectations are formed differently under inflation targeting regimes. Using forecasts for the short-term interest rate, the inflation rate, and output growth for ten emerging markets in Latin-America, central and eastern Europe out of which six economies are inflation targeting economies we estimate expected Taylor-type rules. We find evidence for differences in the expectation formation process in the sense that the well-known Taylor principle fairly holds for countries which adopt an inflation targeting system, while for the other countries it does not.

Suggested Citation

  • Ralf Fendel & Michael Frenkel & Jan-Christoph Rülke, 2008. "Infation Targeting matters! - Novel evidence from 'ex ante' Taylor rules in emerging markets," WHU Working Paper Series - Economics Group 08-02, WHU - Otto Beisheim School of Management.
  • Handle: RePEc:whu:wpaper:08-02
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    References listed on IDEAS

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    1. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June.
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    3. Frederic S. Miskin & Klaus Schmidt-Hebbel, 2007. "Does Inflation Targeting Make a Difference?," Central Banking, Analysis, and Economic Policies Book Series,in: Frederic S. Miskin & Klaus Schmidt-Hebbel & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Se (ed.), Monetary Policy under Inflation Targeting, edition 1, volume 11, chapter 9, pages 291-372 Central Bank of Chile.
    4. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
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    11. Heppke-Falk, Kirsten H. & Hüfner, Felix P., 2004. "Expected budget deficits and interest rate swap spreads - Evidence for France, Germany and Italy," Discussion Paper Series 1: Economic Studies 2004,40, Deutsche Bundesbank.
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    More about this item

    Keywords

    Taylor rule; expectation formation; inflation targeting;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • D84 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Expectations; Speculations
    • C33 - Mathematical and Quantitative Methods - - Multiple or Simultaneous Equation Models; Multiple Variables - - - Models with Panel Data; Spatio-temporal Models

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