Inflation Targeting and Real Exchange Rates in Emerging Markets

47 Pages Posted: 15 Jan 2009 Last revised: 16 Apr 2021

See all articles by Joshua Aizenman

Joshua Aizenman

National Bureau of Economic Research (NBER)

Michael M. Hutchison

University of California, Santa Cruz - Department of Economics

Ilan Noy

Victoria University of Wellington

Date Written: December 2008

Abstract

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.

Suggested Citation

Aizenman, Joshua and Hutchison, Michael M. and Noy, Ilan, Inflation Targeting and Real Exchange Rates in Emerging Markets (December 2008). NBER Working Paper No. w14561, Available at SSRN: https://ssrn.com/abstract=1327234

Joshua Aizenman (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Michael M. Hutchison

University of California, Santa Cruz - Department of Economics ( email )

Social Sciences I
Santa Cruz, CA 95064
United States
831-459-2600 (Phone)
831-459-5900 (Fax)

Ilan Noy

Victoria University of Wellington ( email )

P.O. Box 600
Wellington, 6140
New Zealand

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