Gauging exchange rate targeting

David Parsley and Helen Popper

Journal of International Money and Finance, 2014, vol. 43, issue C, 155-166

Abstract: In this paper, we examine whether a monetary authority targets the exchange rate, per se, or instead simply appears to do so as it responds to the exchange rate and other variables in service to inflation and output targets. We combine data-rich estimation with a system of forward-looking equations in order to disentangle the possibilities. The combined approach reveals the potentially misleading nature of standard estimates of the extent of exchange rate and inflation targeting. We illustrate the approach by applying it to two de jure inflation targetters, Canada and Korea. In contrast to standard methods and much past work, we find that neither country targets its exchange rate; and, both are bona fide inflation targetters.

Keywords: Exchange rates; Exchange rate management; Monetary policy rule; Inflation targeting; Exchange rate regimes; Exchange rate classification; Factor instrumental variables; Data-rich estimation (search for similar items in EconPapers)
JEL-codes: F4 (search for similar items in EconPapers)
Date: 2014
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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:43:y:2014:i:c:p:155-166

DOI: 10.1016/j.jimonfin.2014.01.002

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