The Relationship Between Exchange Rates and Inflation Targeting Revisited PDF Download
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Author: Sebastian Edwards
Publisher:
ISBN:
Category : Foreign exchange
Languages : en
Pages : 58
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Book Description
This paper deals with the relationship between inflation targeting and exchange rates. I address three specific issues: first, I analyze the effectiveness of nominal exchange rates as shock absorbers in countries with inflation targeting. This issue is closely related to the magnitude of the "pass-through" coefficient. Second, I investigate whether exchange rate volatility is different in countries with an inflation targeting regime than in countries with alternative monetary policy arrangements. And third, I discuss whether the exchange rate should play a role in determining the monetary policy stance under inflation targeting. An alternative way of posing this question is whether the exchange rate should have an independent role in an open economy Taylor rule.
Author: Sebastian Edwards
Publisher:
ISBN:
Category : Foreign exchange
Languages : en
Pages : 58
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Book Description
This paper deals with the relationship between inflation targeting and exchange rates. I address three specific issues: first, I analyze the effectiveness of nominal exchange rates as shock absorbers in countries with inflation targeting. This issue is closely related to the magnitude of the "pass-through" coefficient. Second, I investigate whether exchange rate volatility is different in countries with an inflation targeting regime than in countries with alternative monetary policy arrangements. And third, I discuss whether the exchange rate should play a role in determining the monetary policy stance under inflation targeting. An alternative way of posing this question is whether the exchange rate should have an independent role in an open economy Taylor rule.
Author: Sebastian Edwards
Publisher:
ISBN:
Category :
Languages : en
Pages : 45
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Book Description
Author: Anna Nordstrom
Publisher: International Monetary Fund
ISBN: 1589067967
Category : Business & Economics
Languages : en
Pages : 106
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Book Description
This paper explores the role of exchange rates in emerging economies with inflation-targeting regimes, an issue that has become especially germane during the current episode of financial turmoil and volatile capital flows. Under inflation targeting, the interest rate is the main monetary policy tool for influencing activity and inflation, and there is little agreement about the appropriate role of the exchange rate.The exchange rate is a more important monetary policy tool for emerging economies that have adopted inflation targeting than it is for inflation-targeting advanced economies. Inflation-targeting emerging economies generally have less flexible exchange rate arrangements and intervene more frequently in the foreign exchange market than their advanced economy counterparts. The enhanced role of the exchange rate reflects these economies' greater vulnerability to exchange rate shocks and their less developed financial markets. However, their sharper focus on the exchange rate may cause some confusion about the commitment of their central banks to achieve the inflation target and may also complicate policy implementation. Global inflation pressures, greater exchange rate volatility, and the financial stresses from the global financial turmoil that began in mid-2007 are heightening these tensions.
Author: Javier Arturo Reyes Altamirano
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
The current discussion of Inflation Targeting (IT) in emerging economies deals with the effects that nominal exchange rate movements have on the overall inflation rate. The literature has focused in the analysis of the advantages and disadvantages that IT has with respect to other monetary policy regimes and the relevancy of the nominal exchange rate pass-through effect into inflation. So far none of them have dealt with the differences arising from the policy instruments used to fight off inflationary pressure under an IT regime. The literature on IT for emerging economies can be separated in two categories. In the first category the monetary authority uses interest rate policy as the instrument variable to implement and control the inflation target. The second category illustrates when the monetary authorities use international reserves as the instrument to influence the nominal exchange rate in such a way that the depreciation rate is consistent with the overall inflation target. This dissertation presents a model in which both policy instruments are available to the monetary authority. This model is used to address two questions: i) Is IT better than a monetary rule regime? and ii) Is it better to intervene directly in the foreign exchange market rather than use interest rate policy to control exchange rate pressure on inflation, or are they equivalent? The results show that there are important differences between these choices and the answers to these questions are shock dependent. These differences arise because the intervention needed under IT is accompanied by important output costs or benefits depending on the direction of the shock being analyzed. Regarding the pass-through effect, some studies have shown that the pass-through effect from currency depreciation into inflation has been decreasing and therefore is becoming less of an issue for these countries. The literature has offered different explanations for these declines but so far they have not been directly linked to the adoption of IT. This dissertation shows that lower pass-through levels can be a natural result of fear of floating observed in emerging countries that adopted IT and therefore exchange rate effects on inflation are still relevant.
Author: Xiaoming Li
Publisher:
ISBN:
Category :
Languages : en
Pages : 0
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Book Description
This paper does three things. First, it explores the type of asymmetry in exchange rate correlation for five inflation-targeting countries. We show their currencies co-move more closely with the currencies of some influential foreign countries during joint appreciations than joint depreciations against a world currency. Second, it establishes empirically the linkage between interest rate differentials and exchange rate correlation. We find evidence that both widening and narrowing interest rate differentials will reduce the correlation. Third, it proposes a new version of the asymmetric DCC model. The model proves to be capable of providing great insight into the two issues investigated.
Author: Thomas Barnebeck Andersen
Publisher:
ISBN:
Category : Financial crises
Languages : en
Pages : 29
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Book Description
Has inflation targeting (IT) conferred benefits in terms of economic growth on countries that followed this particular monetary policy strategy during the crisis period 2007-12? This paper answers this question in the affirmative. Countries with an IT monetary regime with flexible exchange rates weathered the crisis much better than countries with other monetary regimes, predominantly countries with fixed exchange rates. Part of this difference in growth performance reflects differences in export performance during the initial years of the crisis, which in turn can be explained by real exchange rate depreciations. However, IT seems also to confer other benefits on the countries above and beyond the effects from currency depreciation. Thomas Barnebeck Andersen and Nikolaj Malchow-Møller are in the Department of Business and Economics, University of Southern Denmark. Jens Nordvig is Head of Fixed Income Research Americas, Nomura Securities.
Author: John B. Taylor
Publisher: University of Chicago Press
ISBN: 0226791262
Category : Business & Economics
Languages : en
Pages : 460
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Book Description
This timely volume presents the latest thinking on the monetary policy rules and seeks to determine just what types of rules and policy guidelines function best. A unique cooperative research effort that allowed contributors to evaluate different policy rules using their own specific approaches, this collection presents their striking findings on the potential response of interest rates to an array of variables, including alterations in the rates of inflation, unemployment, and exchange. Monetary Policy Rules illustrates that simple policy rules are more robust and more efficient than complex rules with multiple variables. A state-of-the-art appraisal of the fundamental issues facing the Federal Reserve Board and other central banks, Monetary Policy Rules is essential reading for economic analysts and policymakers alike.
Author: Eric Charles Parrado Herrera
Publisher:
ISBN:
Category :
Languages : en
Pages : 258
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Book Description
Author: Christopher Allsopp
Publisher:
ISBN:
Category :
Languages : en
Pages :
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Book Description
"The United Kingdom's monetary policy strategy is one of floating exchange rates and inflation forecast targeting, with the targeted measure referring to consumer prices. We consider whether it is welfare-reducing to target inflation in the CPI rather than in a narrower index; and the role of the exchange rate in the transmission of monetary policy actions to CPI inflation. We argue that it is appropriate to model imports as intermediate goods rather than as goods consumed directly by households. This leads to a simpler transmission mechanism of monetary policy, while also offering a sustainable explanation for the weakness of the exchange rate/inflation relationship and making consumer price inflation an appropriate monetary policy target"--Federal Reserve Bank of St. Louis web site.
Author: Jordi Galí
Publisher: University of Chicago Press
ISBN: 0226278875
Category : Business & Economics
Languages : en
Pages : 663
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Book Description
United States monetary policy has traditionally been modeled under the assumption that the domestic economy is immune to international factors and exogenous shocks. Such an assumption is increasingly unrealistic in the age of integrated capital markets, tightened links between national economies, and reduced trading costs. International Dimensions of Monetary Policy brings together fresh research to address the repercussions of the continuing evolution toward globalization for the conduct of monetary policy. In this comprehensive book, the authors examine the real and potential effects of increased openness and exposure to international economic dynamics from a variety of perspectives. Their findings reveal that central banks continue to influence decisively domestic economic outcomes—even inflation—suggesting that international factors may have a limited role in national performance. International Dimensions of Monetary Policy will lead the way in analyzing monetary policy measures in complex economies.
