Flexible Inflation Targets, Forex Interventions and Exchange Rate Volatility in Emerging Countries

37 Pages Posted: 15 Apr 2011  

Juan Carlos Berganza

Banco de España

Carmen Broto

Banco de España

Multiple version iconThere are 2 versions of this paper

Date Written: April 13, 2011

Abstract

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of strict IT, which imply a fully flexible exchange rate, or applying a flexible IT, which entails a de facto managed floating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of flexible IT by policymakers.

Keywords: inflation targeting, exchange rate volatility, foreign exchange interventions, emerging economies

JEL Classification: E31, E42, E52, E58, F31

Suggested Citation

Berganza, Juan Carlos and Broto, Carmen, Flexible Inflation Targets, Forex Interventions and Exchange Rate Volatility in Emerging Countries (April 13, 2011). Banco de Espana Working Paper No. 1105. Available at SSRN: https://ssrn.com/abstract=1808631 or http://dx.doi.org/10.2139/ssrn.1808631

Juan Carlos Berganza (Contact Author)

Banco de España ( email )

Madrid 28014
Spain
+34913388034 (Phone)
+34913386212 (Fax)

Carmen Broto

Banco de España ( email )

Alcala 50
Madrid 28014
Spain

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