Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies

Marc Pourroy

Documents de travail du Centre d'Economie de la Sorbonne from Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne

Abstract: Are emerging economies implementing inflation targeting (IT) with a perfectly flexible exchange-rate arrangement, as developed economies do, or have these countries developed their own IT framework? This paper offers a new method for assessing exchange-rate policies that combines the use of “indicator countries”, providing an empirical definition of exchange-rate flexibility or rigidity, and clustering through Gaussian mixture estimates in order to identify countries' de facto regimes. By applying this method to 19 inflation-targeting emerging economies, I find that the probability of those countries having a perfectly flexible arrangement as developed economies do is 52%, while the probability of having a managed float system, obtained through foreign exchange market intervention, is 28%, and that of having a rigid exchange-rate system (similar to those of pegged currencies) is 20%. The results also provide evidence of two different monetary regimes under inflation targeting: flexible IT when the monetary authorities handle only one tool, the interest rate, prevailing in ten economies, and hybrid IT when the monetary authorities add foreign exchange interventions to their toolbox, prevailing in the remaining nine economies

Keywords: Inflation-targeting; foreign exchange interventions; Gaussian mixture model (search for similar items in EconPapers)
JEL-codes: E31 E40 E58 F31 (search for similar items in EconPapers)
Pages: 41 pages
Date: 2013-10
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mac and nep-mon
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Citations: View citations in EconPapers (1)

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ftp://mse.univ-paris1.fr/pub/mse/CES2013/13074.pdf (application/pdf)

Related works:
Working Paper: Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies (2013)
Working Paper: Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies (2013)
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Persistent link: https://EconPapers.repec.org/RePEc:mse:cesdoc:13074

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