Macroeconomic Consequences of Foreign Exchange Futures Market for Inflation Targeting Economies

Ferry Syarifuddin

MPRA Paper from University Library of Munich, Germany

Abstract: Although the discussion on foreign exchange (FX) futures market has drawn significant concern in the economic literature, this paper is the first attempt to address how the FX futures market impacts macroeconomic conditions with the inflation targeting regime. We use a dataset comprising of four emerging market countries with inflation targeting regime and active FX futures market, namely Brazil, Mexico, Turkey, and India, from January 2015 to December 2018. By utilizing Bayesian Panel Vector Autoregressions, we find that the FX futures rate shocks significantly affect the macroeconomic environment and monetary policy due to the strong relationship between the spot and futures market. We also find the initial indication of the market squeezing mechanism in the FX futures market. However, it occurs only in a small magnitude and a short period and thus, the spot exchange rate, inflation rate, and economic growth would not fluctuate abnormally. Our findings are robust for the various robustness checks.

Keywords: Foreign Exchange Futures Market; Inflation Targeting Framework; Macroeconomy; Emerging Economies (search for similar items in EconPapers)
JEL-codes: E52 E58 G23 (search for similar items in EconPapers)
Date: 2020-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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