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 s...
| Main Authors: | , , |
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| Language: | English en_US |
| Published: |
World Bank, Washington, DC
2016
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| Subjects: | |
| Online Access: | http://documents.worldbank.org/curated/en/2016/06/26507283/inflation-targeting-exchange-rate-volatility-emerging-markets http://hdl.handle.net/10986/24629 |
| Summary: | 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. |
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