Inflation Targeting Consequences for Exchange Rates

Paul Beaudry and Amartya Lahiri

No 189, 2018 Meeting Papers from Society for Economic Dynamics

Abstract: We uncover a curious data fact. Countries which have switched to inflation targeting have seen their currencies turn into oil currencies with rising oil prices inducing a currency appreciation while in the pre-inflation targeting regime there was no such relationship. Importantly, this data fact holds independent of whether the country is a net oil exporter or importer. We show that one possible explanation for this is that inflation targeting in open economies renders the equilibrium dynamics indeterminate when uncovered interest parity (UIP) does not hold. In such situations, oil prices may well act as a focal point for currency pricing decisions.

Date: 2018
New Economics Papers: this item is included in nep-cba, nep-ifn, nep-mon and nep-opm
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Persistent link: https://EconPapers.repec.org/RePEc:red:sed018:189

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