Inflation Targeting and Exchange Rate Volatility in Emerging Markets

The paper investigates the relevance of the exchange rate on the reaction function of the central banks of 24 emerging market economies for the period 2000Q1 to 2015Q2. This is done by first employing fixed-effects ordinary least squares and then system generalized method of the moments techniques. Under fixed effects, the exchange rate is found to be an important determinant in the reaction function of emerging market economies. Allowing for the endogeneity of inflation, output gap, and exchange rate, the exchange rate remains a positive and significant determinant, but less quantitatively relevant across inflation-targeting countries. When the sample is partitioned into targeting and nontargeting countries, the exchange rate remains relevant in the reaction function of the latter group. The results remain robust to splitting the sample at the time of the financial crisis of 2007–09 and suggest that, after the crisis, the central banks of emerging market economies responded only to inflation movements in the interest rate reaction function.

Bibliographic Details

Main Authors:	Cabral, Rene, Carneiro, Francisco G., Varella Mollick, Andre
Format:	Working Paper biblioteca
Language:	English en_US
Published:	World Bank, Washington, DC 2016-06
Subjects:	GLOBAL FINANCIAL STABILITY, MONETARY POLICY, CONSUMPTION EXPENDITURES, MARKET COUNTRIES, DISCRETIONARY POLICIES, ECONOMIC GROWTH, CHECKS, MONEY SUPPLIES, REAL INTEREST RATES, INTEREST, MACROECONOMIC MANAGEMENT, REAL EXCHANGE RATES, ASSET PRICES, DEBT CRISIS, CREDIBILITY PROBLEMS, EMERGING ECONOMIES, INTEREST RATE, PRIVATE CREDIT, OPTION, EXCHANGE, MACROECONOMIC POLICY, REAL INTEREST, INTEREST RATE POLICY, INFLATION TARGETING, DOMESTIC INTEREST RATES, HIGH INFLATION, DISCOUNT, CENTRAL BANK INDEPENDENCE, ASSET POSITIONS, DUMMY VARIABLE, RESERVE, CENTRAL BANKS, INFLATION, INTERNATIONAL BANK, INSTRUMENTS, EMERGING MARKET ECONOMIES, CREDIBILITY, BANK LENDING, CENTRAL BANK, INTEREST-RATE, EMERGING MARKET COUNTRIES, INTERNATIONAL FINANCE, POLICY RESPONSE, EXCHANGE RATE MECHANISMS, REJECTION, T-BILL RATES, CURRENCY, EXCHANGE RATE MOVEMENTS, RESERVE BANK, HOME CURRENCY, EXCHANGE RATES, INTEREST RATES, MONETARY FUND, FLEXIBLE EXCHANGE RATE, GLOBALIZATION, EMERGING MARKET, MONETARY TRANSMISSION, MARKETS, DEBT, INFLATION RATE, OPEN ECONOMY, BUSINESS CYCLE, INTERNATIONAL ECONOMICS, MACROECONOMIC INDICATORS, GROSS DOMESTIC PRODUCT, FINANCIAL SYSTEM, MONETARY AUTHORITIES, COMMODITY PRICE, FINANCE, FOREIGN CURRENCY, BANK POLICY, MARKET ECONOMIES, FLOATING EXCHANGE RATE, INTEREST PARITY, EMERGING MARKETS, EQUITY, INTEREST RATE CHANGES, FEDERAL RESERVE, FORWARD MARKET, INTERNATIONAL FINANCIAL STATISTICS, TRANSPARENCY, FINANCIAL STABILITY, PRIVATE SECTOR CREDIT, FINANCIAL CRISIS, CURRENCY CRISIS, WORLD ECONOMY, OUTPUT GAP, PRICE STABILITY, EXPENDITURES, ECONOMY, CAPITAL FLOWS, PROPERTY, PRICE FLUCTUATIONS, T-BILL, REAL EXCHANGE RATE, MARKET, FOREIGN EXCHANGE, PRICE MOVEMENTS, FIXED EFFECTS, INFLATION RATES, BUSINESS CYCLES, CURRENCIES, CENTRAL BANK POLICY, GOODS, EXCHANGE RATE VOLATILITY, EQUITY MARKETS, INVESTMENT, MACROECONOMIC VOLATILITY, RISK, BOND, GROWTH PERFORMANCE, INFLATION OBJECTIVES, FOREIGN INTEREST, FINANCIAL MARKETS, CAPITAL INFLOWS, MONEY MARKET, CONSUMER PRICE INDEX, LENDING, TRANSITION ECONOMIES, EXCHANGE RATE, INSTRUMENT, ROBUSTNESS CHECKS, STABLE INFLATION, LIABILITIES, OPEN ECONOMIES, MACROECONOMIC PERFORMANCE, ASSET PRICE, ECONOMIES, INTEREST RATE DIFFERENTIALS, INVESTMENT DECISION,
Online Access:	http://documents.worldbank.org/curated/en/2016/06/26507283/inflation-targeting-exchange-rate-volatility-emerging-markets http://hdl.handle.net/10986/24629
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