Inflation targeting and real exchange rates in emerging markets

J Aizenman, M Hutchison, I Noy - World Development, 2011 - Elsevier
World Development, 2011Elsevier
We investigate inflation targeting (IT) in emerging markets, focusing on the role of the real
exchange rate and the distinction between commodity and non-commodity exporters. IT
emerging markets appear to follow a “mixed strategy” whereby both inflation and real
exchange rates are important determinants of policy interest rates. The response to real
exchange rates, however, is more constrained than in non-IT regimes. We also find that the
response to real exchange rates is strongest in those countries following IT policies that are …
We investigate inflation targeting (IT) in emerging markets, focusing on the role of the real exchange rate and the distinction between commodity and non-commodity exporters. IT emerging markets appear to follow a “mixed strategy” whereby both inflation and real exchange rates are important determinants of policy interest rates. The response to real exchange rates, however, is more constrained than in non-IT regimes. We also find that the response to real exchange rates is strongest in those countries following IT policies that are relatively intensive in exporting basic commodities; and present a theoretical model that explains these empirical results.
Elsevier
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