Inflation Targeting and Exchange Rate Volatility in Emerging Markets

The paper investigates the relevance of the exchange rate on the reaction function of the central banks of 24 emerging market economies for the period 2000Q1 to 2015Q2. This is done by first employing fixed-effects ordinary least squares and then s...

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Main Authors:	Cabral, Rene, Carneiro, Francisco G., Varella Mollick, Andre
Format:	Working Paper
Language:	English en_US
Published:	World Bank, Washington, DC 2016
Subjects:	GLOBAL FINANCIAL STABILITY MONETARY POLICY CONSUMPTION EXPENDITURES MARKET COUNTRIES DISCRETIONARY POLICIES ECONOMIC GROWTH CHECKS MONEY SUPPLIES REAL INTEREST RATES INTEREST MACROECONOMIC MANAGEMENT REAL EXCHANGE RATES ASSET PRICES DEBT CRISIS CREDIBILITY PROBLEMS EMERGING ECONOMIES INTEREST RATE PRIVATE CREDIT OPTION EXCHANGE MACROECONOMIC POLICY REAL INTEREST INTEREST RATE POLICY INFLATION TARGETING DOMESTIC INTEREST RATES HIGH INFLATION DISCOUNT CENTRAL BANK INDEPENDENCE ASSET POSITIONS DUMMY VARIABLE RESERVE CENTRAL BANKS INFLATION INTERNATIONAL BANK INSTRUMENTS EMERGING MARKET ECONOMIES CREDIBILITY BANK LENDING CENTRAL BANK INTEREST-RATE EMERGING MARKET COUNTRIES INTERNATIONAL FINANCE POLICY RESPONSE EXCHANGE RATE MECHANISMS REJECTION T-BILL RATES CURRENCY EXCHANGE RATE MOVEMENTS RESERVE BANK HOME CURRENCY EXCHANGE RATES INTEREST RATES MONETARY FUND FLEXIBLE EXCHANGE RATE GLOBALIZATION EMERGING MARKET MONETARY TRANSMISSION MARKETS DEBT INFLATION RATE OPEN ECONOMY BUSINESS CYCLE INTERNATIONAL ECONOMICS MACROECONOMIC INDICATORS GROSS DOMESTIC PRODUCT FINANCIAL SYSTEM MONETARY AUTHORITIES COMMODITY PRICE FINANCE FOREIGN CURRENCY BANK POLICY MARKET ECONOMIES FLOATING EXCHANGE RATE INTEREST PARITY EMERGING MARKETS EQUITY INTEREST RATE CHANGES FEDERAL RESERVE FORWARD MARKET INTERNATIONAL FINANCIAL STATISTICS TRANSPARENCY FINANCIAL STABILITY PRIVATE SECTOR CREDIT FINANCIAL CRISIS CURRENCY CRISIS WORLD ECONOMY OUTPUT GAP PRICE STABILITY EXPENDITURES ECONOMY CAPITAL FLOWS PROPERTY PRICE FLUCTUATIONS T-BILL REAL EXCHANGE RATE MARKET FOREIGN EXCHANGE PRICE MOVEMENTS FIXED EFFECTS INFLATION RATES BUSINESS CYCLES CURRENCIES CENTRAL BANK POLICY GOODS EXCHANGE RATE VOLATILITY EQUITY MARKETS INVESTMENT MACROECONOMIC VOLATILITY RISK BOND GROWTH PERFORMANCE INFLATION OBJECTIVES FOREIGN INTEREST FINANCIAL MARKETS CAPITAL INFLOWS MONEY MARKET CONSUMER PRICE INDEX LENDING TRANSITION ECONOMIES EXCHANGE RATE INSTRUMENT ROBUSTNESS CHECKS STABLE INFLATION LIABILITIES OPEN ECONOMIES MACROECONOMIC PERFORMANCE ASSET PRICE ECONOMIES INTEREST RATE DIFFERENTIALS INVESTMENT DECISION
Online Access:	http://documents.worldbank.org/curated/en/2016/06/26507283/inflation-targeting-exchange-rate-volatility-emerging-markets http://hdl.handle.net/10986/24629

id	okr-10986-24629
recordtype	oai_dc
spelling	okr-10986-246292021-04-23T14:04:23Z Inflation Targeting and Exchange Rate Volatility in Emerging Markets Cabral, Rene Carneiro, Francisco G. Varella Mollick, Andre GLOBAL FINANCIAL STABILITY MONETARY POLICY CONSUMPTION EXPENDITURES MARKET COUNTRIES DISCRETIONARY POLICIES ECONOMIC GROWTH CHECKS MONEY SUPPLIES REAL INTEREST RATES INTEREST MACROECONOMIC MANAGEMENT REAL EXCHANGE RATES ASSET PRICES DEBT CRISIS CREDIBILITY PROBLEMS EMERGING ECONOMIES INTEREST RATE PRIVATE CREDIT OPTION EXCHANGE MACROECONOMIC POLICY REAL INTEREST INTEREST RATE POLICY INFLATION TARGETING DOMESTIC INTEREST RATES HIGH INFLATION DISCOUNT CENTRAL BANK INDEPENDENCE ASSET POSITIONS DUMMY VARIABLE RESERVE CENTRAL BANKS INFLATION INTERNATIONAL BANK INSTRUMENTS EMERGING MARKET ECONOMIES CREDIBILITY BANK LENDING CENTRAL BANK INTEREST-RATE EMERGING MARKET COUNTRIES INTERNATIONAL FINANCE POLICY RESPONSE EXCHANGE RATE MECHANISMS REJECTION T-BILL RATES CURRENCY EXCHANGE RATE MOVEMENTS RESERVE BANK HOME CURRENCY EXCHANGE RATES INTEREST RATES MONETARY FUND FLEXIBLE EXCHANGE RATE GLOBALIZATION EMERGING MARKET MONETARY TRANSMISSION MARKETS DEBT INFLATION RATE OPEN ECONOMY BUSINESS CYCLE INTERNATIONAL ECONOMICS MACROECONOMIC INDICATORS GROSS DOMESTIC PRODUCT FINANCIAL SYSTEM MONETARY AUTHORITIES COMMODITY PRICE FINANCE FOREIGN CURRENCY BANK POLICY MARKET ECONOMIES FLOATING EXCHANGE RATE INTEREST PARITY EMERGING MARKETS EQUITY INTEREST RATE CHANGES FEDERAL RESERVE FORWARD MARKET INTERNATIONAL FINANCIAL STATISTICS TRANSPARENCY FINANCIAL STABILITY PRIVATE SECTOR CREDIT FINANCIAL CRISIS CURRENCY CRISIS WORLD ECONOMY OUTPUT GAP PRICE STABILITY EXPENDITURES ECONOMY CAPITAL FLOWS PROPERTY PRICE FLUCTUATIONS T-BILL REAL EXCHANGE RATE MARKET FOREIGN EXCHANGE PRICE MOVEMENTS FIXED EFFECTS INFLATION RATES BUSINESS CYCLES CURRENCIES CENTRAL BANK POLICY GOODS EXCHANGE RATE VOLATILITY EQUITY MARKETS INVESTMENT MACROECONOMIC VOLATILITY RISK BOND GROWTH PERFORMANCE INFLATION OBJECTIVES FOREIGN INTEREST FINANCIAL MARKETS CAPITAL INFLOWS MONEY MARKET CONSUMER PRICE INDEX LENDING TRANSITION ECONOMIES EXCHANGE RATE INSTRUMENT ROBUSTNESS CHECKS STABLE INFLATION LIABILITIES OPEN ECONOMIES MACROECONOMIC PERFORMANCE ASSET PRICE ECONOMIES INTEREST RATE DIFFERENTIALS INVESTMENT DECISION The paper investigates the relevance of the exchange rate on the reaction function of the central banks of 24 emerging market economies for the period 2000Q1 to 2015Q2. This is done by first employing fixed-effects ordinary least squares and then system generalized method of the moments techniques. Under fixed effects, the exchange rate is found to be an important determinant in the reaction function of emerging market economies. Allowing for the endogeneity of inflation, output gap, and exchange rate, the exchange rate remains a positive and significant determinant, but less quantitatively relevant across inflation-targeting countries. When the sample is partitioned into targeting and nontargeting countries, the exchange rate remains relevant in the reaction function of the latter group. The results remain robust to splitting the sample at the time of the financial crisis of 2007–09 and suggest that, after the crisis, the central banks of emerging market economies responded only to inflation movements in the interest rate reaction function. 2016-07-07T20:07:01Z 2016-07-07T20:07:01Z 2016-06 Working Paper http://documents.worldbank.org/curated/en/2016/06/26507283/inflation-targeting-exchange-rate-volatility-emerging-markets http://hdl.handle.net/10986/24629 English en_US Policy Research Working Paper;No. 7712 CC BY 3.0 IGO http://creativecommons.org/licenses/by/3.0/igo/ World Bank World Bank, Washington, DC Publications & Research Publications & Research :: Policy Research Working Paper
repository_type	Digital Repository
institution_category	Foreign Institution
institution	Digital Repositories
building	World Bank Open Knowledge Repository
collection	World Bank
language	English en_US
topic	GLOBAL FINANCIAL STABILITY MONETARY POLICY CONSUMPTION EXPENDITURES MARKET COUNTRIES DISCRETIONARY POLICIES ECONOMIC GROWTH CHECKS MONEY SUPPLIES REAL INTEREST RATES INTEREST MACROECONOMIC MANAGEMENT REAL EXCHANGE RATES ASSET PRICES DEBT CRISIS CREDIBILITY PROBLEMS EMERGING ECONOMIES INTEREST RATE PRIVATE CREDIT OPTION EXCHANGE MACROECONOMIC POLICY REAL INTEREST INTEREST RATE POLICY INFLATION TARGETING DOMESTIC INTEREST RATES HIGH INFLATION DISCOUNT CENTRAL BANK INDEPENDENCE ASSET POSITIONS DUMMY VARIABLE RESERVE CENTRAL BANKS INFLATION INTERNATIONAL BANK INSTRUMENTS EMERGING MARKET ECONOMIES CREDIBILITY BANK LENDING CENTRAL BANK INTEREST-RATE EMERGING MARKET COUNTRIES INTERNATIONAL FINANCE POLICY RESPONSE EXCHANGE RATE MECHANISMS REJECTION T-BILL RATES CURRENCY EXCHANGE RATE MOVEMENTS RESERVE BANK HOME CURRENCY EXCHANGE RATES INTEREST RATES MONETARY FUND FLEXIBLE EXCHANGE RATE GLOBALIZATION EMERGING MARKET MONETARY TRANSMISSION MARKETS DEBT INFLATION RATE OPEN ECONOMY BUSINESS CYCLE INTERNATIONAL ECONOMICS MACROECONOMIC INDICATORS GROSS DOMESTIC PRODUCT FINANCIAL SYSTEM MONETARY AUTHORITIES COMMODITY PRICE FINANCE FOREIGN CURRENCY BANK POLICY MARKET ECONOMIES FLOATING EXCHANGE RATE INTEREST PARITY EMERGING MARKETS EQUITY INTEREST RATE CHANGES FEDERAL RESERVE FORWARD MARKET INTERNATIONAL FINANCIAL STATISTICS TRANSPARENCY FINANCIAL STABILITY PRIVATE SECTOR CREDIT FINANCIAL CRISIS CURRENCY CRISIS WORLD ECONOMY OUTPUT GAP PRICE STABILITY EXPENDITURES ECONOMY CAPITAL FLOWS PROPERTY PRICE FLUCTUATIONS T-BILL REAL EXCHANGE RATE MARKET FOREIGN EXCHANGE PRICE MOVEMENTS FIXED EFFECTS INFLATION RATES BUSINESS CYCLES CURRENCIES CENTRAL BANK POLICY GOODS EXCHANGE RATE VOLATILITY EQUITY MARKETS INVESTMENT MACROECONOMIC VOLATILITY RISK BOND GROWTH PERFORMANCE INFLATION OBJECTIVES FOREIGN INTEREST FINANCIAL MARKETS CAPITAL INFLOWS MONEY MARKET CONSUMER PRICE INDEX LENDING TRANSITION ECONOMIES EXCHANGE RATE INSTRUMENT ROBUSTNESS CHECKS STABLE INFLATION LIABILITIES OPEN ECONOMIES MACROECONOMIC PERFORMANCE ASSET PRICE ECONOMIES INTEREST RATE DIFFERENTIALS INVESTMENT DECISION
spellingShingle	GLOBAL FINANCIAL STABILITY MONETARY POLICY CONSUMPTION EXPENDITURES MARKET COUNTRIES DISCRETIONARY POLICIES ECONOMIC GROWTH CHECKS MONEY SUPPLIES REAL INTEREST RATES INTEREST MACROECONOMIC MANAGEMENT REAL EXCHANGE RATES ASSET PRICES DEBT CRISIS CREDIBILITY PROBLEMS EMERGING ECONOMIES INTEREST RATE PRIVATE CREDIT OPTION EXCHANGE MACROECONOMIC POLICY REAL INTEREST INTEREST RATE POLICY INFLATION TARGETING DOMESTIC INTEREST RATES HIGH INFLATION DISCOUNT CENTRAL BANK INDEPENDENCE ASSET POSITIONS DUMMY VARIABLE RESERVE CENTRAL BANKS INFLATION INTERNATIONAL BANK INSTRUMENTS EMERGING MARKET ECONOMIES CREDIBILITY BANK LENDING CENTRAL BANK INTEREST-RATE EMERGING MARKET COUNTRIES INTERNATIONAL FINANCE POLICY RESPONSE EXCHANGE RATE MECHANISMS REJECTION T-BILL RATES CURRENCY EXCHANGE RATE MOVEMENTS RESERVE BANK HOME CURRENCY EXCHANGE RATES INTEREST RATES MONETARY FUND FLEXIBLE EXCHANGE RATE GLOBALIZATION EMERGING MARKET MONETARY TRANSMISSION MARKETS DEBT INFLATION RATE OPEN ECONOMY BUSINESS CYCLE INTERNATIONAL ECONOMICS MACROECONOMIC INDICATORS GROSS DOMESTIC PRODUCT FINANCIAL SYSTEM MONETARY AUTHORITIES COMMODITY PRICE FINANCE FOREIGN CURRENCY BANK POLICY MARKET ECONOMIES FLOATING EXCHANGE RATE INTEREST PARITY EMERGING MARKETS EQUITY INTEREST RATE CHANGES FEDERAL RESERVE FORWARD MARKET INTERNATIONAL FINANCIAL STATISTICS TRANSPARENCY FINANCIAL STABILITY PRIVATE SECTOR CREDIT FINANCIAL CRISIS CURRENCY CRISIS WORLD ECONOMY OUTPUT GAP PRICE STABILITY EXPENDITURES ECONOMY CAPITAL FLOWS PROPERTY PRICE FLUCTUATIONS T-BILL REAL EXCHANGE RATE MARKET FOREIGN EXCHANGE PRICE MOVEMENTS FIXED EFFECTS INFLATION RATES BUSINESS CYCLES CURRENCIES CENTRAL BANK POLICY GOODS EXCHANGE RATE VOLATILITY EQUITY MARKETS INVESTMENT MACROECONOMIC VOLATILITY RISK BOND GROWTH PERFORMANCE INFLATION OBJECTIVES FOREIGN INTEREST FINANCIAL MARKETS CAPITAL INFLOWS MONEY MARKET CONSUMER PRICE INDEX LENDING TRANSITION ECONOMIES EXCHANGE RATE INSTRUMENT ROBUSTNESS CHECKS STABLE INFLATION LIABILITIES OPEN ECONOMIES MACROECONOMIC PERFORMANCE ASSET PRICE ECONOMIES INTEREST RATE DIFFERENTIALS INVESTMENT DECISION Cabral, Rene Carneiro, Francisco G. Varella Mollick, Andre Inflation Targeting and Exchange Rate Volatility in Emerging Markets
relation	Policy Research Working Paper;No. 7712
description	The paper investigates the relevance of the exchange rate on the reaction function of the central banks of 24 emerging market economies for the period 2000Q1 to 2015Q2. This is done by first employing fixed-effects ordinary least squares and then system generalized method of the moments techniques. Under fixed effects, the exchange rate is found to be an important determinant in the reaction function of emerging market economies. Allowing for the endogeneity of inflation, output gap, and exchange rate, the exchange rate remains a positive and significant determinant, but less quantitatively relevant across inflation-targeting countries. When the sample is partitioned into targeting and nontargeting countries, the exchange rate remains relevant in the reaction function of the latter group. The results remain robust to splitting the sample at the time of the financial crisis of 2007–09 and suggest that, after the crisis, the central banks of emerging market economies responded only to inflation movements in the interest rate reaction function.
format	Working Paper
author	Cabral, Rene Carneiro, Francisco G. Varella Mollick, Andre
author_facet	Cabral, Rene Carneiro, Francisco G. Varella Mollick, Andre
author_sort	Cabral, Rene
title	Inflation Targeting and Exchange Rate Volatility in Emerging Markets
title_short	Inflation Targeting and Exchange Rate Volatility in Emerging Markets
title_full	Inflation Targeting and Exchange Rate Volatility in Emerging Markets
title_fullStr	Inflation Targeting and Exchange Rate Volatility in Emerging Markets
title_full_unstemmed	Inflation Targeting and Exchange Rate Volatility in Emerging Markets
title_sort	inflation targeting and exchange rate volatility in emerging markets
publisher	World Bank, Washington, DC
publishDate	2016
url	http://documents.worldbank.org/curated/en/2016/06/26507283/inflation-targeting-exchange-rate-volatility-emerging-markets http://hdl.handle.net/10986/24629
_version_	1764457224548122624

Inflation Targeting and Exchange Rate Volatility in Emerging Markets

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