Which inflation targeters respond to exchange rate movements? Evidence from emerging market economies

ABSTRACT

There is a significant difference between de facto and de jure regimes in terms of exchange rates, especially in emerging market economies. A simple open economy model is used to test the empirical plausibility of a managed exchange rate system in which the monetary authority responds to exchange rate movements with foreign exchange intervention as an additional goal of monetary policy. This study demonstrates that this system fits the data better than a float-system specification. In addition, it is found that the authorities in Asian countries are more likely to intervene in the foreign exchange market with a higher degree of concern regarding exchange rate movements. The study empirically confirms that all emerging market inflation targeters have employed a de facto managed exchange rate system while adopting a de jure float system.

KEYWORDS:

• Managed exchange rate
• sterilized intervention
• emerging market
• open economy model

JEL CLASSIFICATION:

• F41
• E52

Disclosure statement

No potential conflict of interest was reported by the author(s).

Additional information

Funding

The work was supported by the JSPS [20K01633].