Inflation Targeting by Debtor Central Banks in Emerging Market Economies

36 Pages Posted: 31 Jul 2010

See all articles by Axel Loeffler

Axel Loeffler

Deutsche Bundesbank

Gunther Schnabl

University of Leipzig - Institute for Economic Policy

Franziska Schobert

Deutsche Bundesbank

Date Written: July 29, 2010

Abstract

Given buoyant capital inflows and managed exchange rates the majority of emerging market central banks have continued to accumulate massive foreign reserves. If left unsterilized, the liquidity expansion can threaten domestic macroeconomic stability. To contain domestic inflation these central banks absorb rather then provide liquidity in their regular monetary policy operations. Based on an augmented Barro-Gordon framework we show that inflation targeting within an environment of surplus liquidity is less efficient, because absorbing liquidity raises the costs of monetary policy operations. By implementing sterilization costs into the central bank’s objective function the inflation bias increases.

Keywords: inflation targeting, exchange rate targeting, sterilization, debtor central bank

JEL Classification: E52, E58

Suggested Citation

Loeffler, Axel and Schnabl, Gunther and Schobert, Franziska, Inflation Targeting by Debtor Central Banks in Emerging Market Economies (July 29, 2010). CESifo Working Paper Series No. 3138, Available at SSRN: https://ssrn.com/abstract=1650531

Axel Loeffler

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Straße 14
Frankfurt am Main, 60431
Germany
+49 69 9566 2966 (Phone)

HOME PAGE: http://www.bundesbank.de

Gunther Schnabl (Contact Author)

University of Leipzig - Institute for Economic Policy ( email )

Institute for Economic Policy
Grimmaische Straße 12
Leipzig, 04109
Germany

HOME PAGE: http://www.wifa.uni-leipzig.de/iwp/

Franziska Schobert

Deutsche Bundesbank ( email )

Wilhelm-Epstein-Str. 14
Frankfurt/Main, 60431
Germany

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