Inflation Targeting and Real Exchange Rates in Emerging Markets
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NBER Working Paper No. 14561
Issued in December 2008
NBER Program(s): IFM ITI ME
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.
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This paper was revised on December 5, 2011 Acknowledgments
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