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Inflation Targeting and Real Exchange Rates in Emerging Markets

Authors
Journal
World Development
0305-750X
Publisher
Elsevier
Publication Date
Volume
39
Issue
5
Identifiers
DOI: 10.1016/j.worlddev.2010.11.005
Keywords
  • Inflation Targeting
  • Taylor Rule
  • Real Exchange Rate
  • Commodity Export
Disciplines
  • Economics

Abstract

Summary 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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