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

Listed author(s):
  • Ralf Fendel
  • Michael Frenkel
  • Jan-Christoph Rülke
Registered author(s):

    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.

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    File URL: https://www.whu.edu/fileadmin/data/RePEc/PDF/WP-08-02.pdf
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    Paper provided by WHU - Otto Beisheim School of Management in its series WHU Working Paper Series - Economics Group with number 08-02.

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    Length: 36 pages
    Date of creation: Aug 2008
    Handle: RePEc:whu:wpaper:08-02
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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. Beck, Roland, 2001. "Do country fundamentals explain emerging market bond spreads?," CFS Working Paper Series 2001/02, Center for Financial Studies (CFS).
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    6. Joel T. Krueger & Kenneth N. Kuttner, 1996. "The Fed funds futures rate as a predictor of federal reserve policy," Journal of Futures Markets, John Wiley & Sons, Ltd., vol. 16(8), pages 865-879, December.
    7. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June.
    8. Athanasios Orphanides, 2001. "Monetary Policy Rules Based on Real-Time Data," American Economic Review, American Economic Association, vol. 91(4), pages 964-985, September.
    9. Vittorio Corbo & Klaus Schmidt-Hebbel, 2001. "Inflation Targeting in Latin America," Working Papers Central Bank of Chile 105, Central Bank of Chile.
    10. Glenn D. Rudebusch, 2006. "Monetary Policy Inertia: Fact or Fiction?," International Journal of Central Banking, International Journal of Central Banking, vol. 2(4), December.
    11. John B. Taylor, 1999. "A Historical Analysis of Monetary Policy Rules," NBER Chapters,in: Monetary Policy Rules, pages 319-348 National Bureau of Economic Research, Inc.
    12. Keane, Michael P & Runkle, David E, 1990. "Testing the Rationality of Price Forecasts: New Evidence from Panel Data," American Economic Review, American Economic Association, vol. 80(4), pages 714-735, September.
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    14. Schmidt-Hebbel, Klaus & Tapia, Matias, 2002. "Inflation targeting in Chile," The North American Journal of Economics and Finance, Elsevier, vol. 13(2), pages 125-146, August.
    15. 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, Research Centre.
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