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Inflation targeting and the forward bias puzzle in emerging countries

Dramane Coulibaly () and Hubert Kempf

Journal of International Money and Finance, 2019, vol. 90, issue C, 19-33

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 reflects the performance of inflation targeting regimes in lowering the level and volatility of inflation. Our finding holds when controlling for country-specific effects, time-specific effects, global disinflation, exchange rate management, crises, and using different econometric techniques.

Keywords: Inflation targeting; Uncovered interest parity; Forward bias puzzle; Emerging countries; E31; E52; F31 (search for similar items in EconPapers)
Date: 2019
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Working Paper: Inflation targeting and the forward bias puzzle in emerging countries (2019)
Working Paper: Inflation Targeting and the Forward Bias Puzzle in Emerging Countries (2017) Downloads
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DOI: 10.1016/j.jimonfin.2018.09.003

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