NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Relationship Between Exchange Rates and Inflation Targeting Revisited

Sebastian Edwards

NBER Working Paper No. 12163
Issued in April 2006
NBER Program(s):   IFM   ME

This paper deals with the relationship between inflation targeting and exchange rates. I address three specific issues: first, I analyze the effectiveness of nominal exchange rates as shock absorbers in countries with inflation targeting. This issue is closely related to the magnitude of the "pass-through" coefficient. Second, I investigate whether exchange rate volatility is different in countries with an inflation targeting regime than in countries with alternative monetary policy arrangements. And third, I discuss whether the exchange rate should play a role in determining the monetary policy stance under inflation targeting. An alternative way of posing this question is whether the exchange rate should have an independent role in an open economy Taylor rule.

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Document Object Identifier (DOI): 10.3386/w12163

Published: Mishkin, Frederic S. and Klaus Schmidt-Hebbel (eds.) Monetary Policy under Inflation Targeting, Series on Central Banking, Analysis, and Economic Policies, vol. 11. Santiago: Central Bank of Chile, 2007.

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