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Inflation targeting and real exchange rates: A bias correction approach

Jaebeom Kim

Economics Letters, 2014, vol. 125, issue 2, 253-256

Abstract: This paper examines whether inflation targeting (IT) influences purchasing power parity (PPP) by a bias correction approach under cross-sectional dependence. The recursive mean adjustment (RMA) method proposed by So and Shin (1999) and Shin and So (2001) is employed to correct a downward bias in half-life estimates of real exchange rates. More importantly, the empirical results show that IT lowers variability of real exchange rates and plays an important role in providing favorable evidence for long-run PPP.

Keywords: Inflation targeting; Recursive mean adjustment; Half-life; Cross-sectional dependence; Panel unit root; Real exchange rate (search for similar items in EconPapers)
JEL-codes: F30 F31 (search for similar items in EconPapers)
Date: 2014
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DOI: 10.1016/j.econlet.2014.09.019

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Handle: RePEc:eee:ecolet:v:125:y:2014:i:2:p:253-256