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Inflation Targeting and the Forward Bias Puzzle in Emerging Countries

Dramane Coulibaly () and Hubert Kempf ()

No 2017-12, EconomiX Working Papers from University of Paris West - Nanterre la Défense, EconomiX

Abstract: Based on quarterly data on 31 emerging countries (among which 16 are inflation targeting countries) from 1990Q1 to 2014Q3, we obtain a strong support for the conjecture that the implementation of inflation targeting weakens the Fisherian relation between expected depreciation and the interest rate differential (uncovered interest parity condition) and thus is conducive to the appearance of the forward bias puzzle in emerging countries. We show that this reects the performance of inflation targeting regimes in lowering the level and volatility of inflation which leads non-Fisherian fundamentals to be predominant. Our finding holds when controlling for country-specific effects, time-specific effects, global disinflationation, exchange rate management and using different econometric techniques.

Keywords: Inflation targeting; uncovered interest parity; forward bias puzzle; emerging countries. (search for similar items in EconPapers)
JEL-codes: E31 E52 F31 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-mac and nep-mon
Date: 2017
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