Inflation Targeting and Real Exchange Rates in Emerging Markets

Joshua Aizenman, Michael Hutchison, Ilan Noy

Research output: Contribution to journalArticlepeer-review

85 Scopus citations

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.

Original languageEnglish
Pages (from-to)712-724
Number of pages13
JournalWorld Development
Volume39
Issue number5
DOIs
StatePublished - 1 May 2011
Externally publishedYes

Keywords

  • Commodity export
  • Inflation targeting
  • Real exchange rate
  • Taylor rule

ASJC Scopus subject areas

  • Geography, Planning and Development
  • Development
  • Sociology and Political Science
  • Economics and Econometrics

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