Inflation Targeting and Real Exchange Rates in Emerging Markets

Joshua Aizenman; Michael Hutchison; Ilan Noy

doi:10.3386/w14561

Inflation Targeting and Real Exchange Rates in Emerging Markets

Joshua Aizenman, Michael Hutchison & Ilan Noy

Working Paper 14561

DOI 10.3386/w14561

Issue Date December 2008

Revision Date December 2011

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.

We thank Mahir Binici, Nan Geng, Gurnain Kaur Pasricha and Kulakarn Tantitemit for helpful research assistance and to Scott Roger and Mark Stone for providing data. We are grateful to two anonymous referees of this journal for helpful comments. We also thank participants of the Research Seminar of the IMF, especially Herman Kamil; participants of the Third NIPFA-DEA Program Meeting on Capital Flows Conference in New Delhi, especially our discussant Vincent Coen; and participants at a seminar at the University of Victoria, Canada, for helpful comments. The views expressed herein are those of the author(s) and do not necessarily reflect the views of the National Bureau of Economic Research.
MARC RIS BibTeΧ
- December 9, 2008
- November 5, 2009

Inflation Targeting and Real Exchange Rates in Emerging Markets

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