Working Paper: NBER ID: w14561
Authors: Joshua Aizenman; Michael Hutchison; Ilan Noy
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.
Keywords: Inflation Targeting; Real Exchange Rates; Emerging Markets; Commodity Exporters
JEL Codes: E52; E58; F15; F3
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Inflation targeting (IT) (E31) | Response of central banks to inflation (E52) |
| Inflation targeting (IT) (E31) | Response of central banks to real exchange rates (F31) |
| Non-IT countries (F29) | Response of central banks to real exchange rates (F31) |
| Commodity-exporting countries (F14) | Response of central banks to real exchange rates (F31) |
| Inflation targeting (IT) (E31) | Response of central banks to inflation vs non-IT countries (E52) |