Inflation Targeting and Real Exchange Rates in Emerging Markets

Joshua Aizenman, Michael Hutchison, Ilan Noy

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.

(247 K)

Published: Aizenman, Joshua & Hutchison, Michael & Noy, Ilan, 2011. "Inflation Targeting and Real Exchange Rates in Emerging Markets," World Development, Elsevier, vol. 39(5), pages 712-724, May.

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This paper was revised on December 5, 2011

Acknowledgments

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