Asymmetric exchange rate policy in inflation targeting developing countries

Ahmet Benlialper, Hasan Cömert and Nadir Öcal

No 86/2017, IPE Working Papers from Berlin School of Economics and Law, Institute for International Political Economy (IPE)

Abstract: In the last decades, many developing countries abandoned their existing policy regimes and adopted inflation targeting (IT) by which they aimed to control inflation through the use of policy interest rates. During the period before the crisis, most of these countries experienced large appreciations in their currencies. Given that appreciation helps central banks curb inflationary pressures, we ask whether central banks in developing countries have different policy stances with respect to depreciation and appreciation in order to hit their inflation targets. To that end, we analyze central banks' interest rate decisions by estimating a nonlinear monetary policy reaction function for a set of IT developing countries using a panel threshold model. Our findings suggest that during the period under investigation (2002-2008), central banks in developing countries implementing IT tolerated appreciation by remaining inactive in the case of appreciation, but fought against depreciation pressures beyond some threshold. We are unable to detect a similar asymmetric response for IT advanced countries suggesting that an asymmetric policy stance is particular to IT developing countries. Although there is a vast literature on asymmetric responses of various central banks to changes in inflation and output, an asymmetric stance with regards to the exchange rate has not been analyzed yet in a rigorous way especially within the context of IT developing countries. In this sense, our study is the first in the literature and thus is expected to fill an important gap.

Keywords: Inflation Targeting; Central Banking; Developing Countries; Exchange Rates (search for similar items in EconPapers)
JEL-codes: E31 E52 E58 F31 (search for similar items in EconPapers)
Date: 2017
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
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Citations: View citations in EconPapers (2)

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Working Paper: Asymmetric Exchange Rate Policy in Inflation Targeting Developing Countries (2017)
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Persistent link: https://EconPapers.repec.org/RePEc:zbw:ipewps:862017

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