Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries

Juan Carlos Berganza and Carmen Broto

No 9/2011, BOFIT Discussion Papers from Bank of Finland Institute for Emerging Economies (BOFIT)

Abstract: Emerging economies with inflation targets (IT) face a dilemma between fulflling the theoretical conditions of "strict IT", which implies a fully flexible exchange rate, or applying a "flexible IT", which entails a de facto managed floating exchange rate with forex 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, forex interventions in some IT countries have been more effective in reducing 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 (search for similar items in EconPapers)
JEL-codes: E31 E42 E52 E58 F31 (search for similar items in EconPapers)
Date: 2011
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Related works:
Journal Article: Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries (2012)
Working Paper: Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries (2011)
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