The role of the exchange rate in inflation-targeting emerging economies
By: Mark Stone ... [et al.].
Contributors: Stone, Mark R.; International Monetary Fund.
Series: Occasional paper -- 267; Occasional paper (International Monetary Fund) -- no. 267.
Publisher: International Monetary Fund
Published: 2009
Place of publication: Washington, D.C
Language: eng
Number of pages: 96
ISBN-13: 9781589067967
Subjects: Foreign exchange rates -- Developing countries; Monetary policy -- Developing countries; Inflation (Finance) -- Developing countries
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.--Publisher's description.
Notes: Includes bibliographical references (p. 90-94).
Table of contents: title: Introduction; title: Why the exchange rate plays a large role in emerging economies; title: Different roles for the exchange rate and the policy trade-offs; title: Foreign exchange market intervention in inflation-targeting policy implementation; title: Implications to full-fledged inflation targeting; title: Implications of recent global shocks; title: Conclusions.