Inflation targeting or Exchange Rate Targeting: Which Framework Supports The Goal of Price Stability in Emerging Market Economics?

Noura Abu Asab (), Juan Cuestas and Alberto Montagnoli ()

No 2015025, Working Papers from The University of Sheffield, Department of Economics

Abstract: We investigate the relationship between inflation and inflation uncertainty under inflation targeting and a conventional fixed exchange rate system and the impact of each regime on inflation and inflation uncertainty over the span from 1980:01 to 2014:06. The results from GARCH in mean models reveal that, under the two monetary regimes, inflation increases inflation uncertainty and inflation uncertainty raises inflation. This positive bi-directional relationship between inflation and inflation uncertainty provides evidence of the importance of non-discretionary monetary policies. Both regimes appear effective in reducing inflation uncertainty in the long-run which suggests the importance of monetary regimes as signalling devices for inflation expectations. The fixed exchange rate regime has no impact on average inflation and inflation inertia, while inflation targeting has been successful at lowering average inflation and inflation persistence of its followers. Nevertheless, the results provide evidence that inflation targeting countries have not benefited equally from inflation targeting.

Keywords: Inflation Targeting; Fixed Exchange Rate System; GARCH; Monetary Policy; Price Stability (search for similar items in EconPapers)
JEL-codes: C54 C58 E50 E58 (search for similar items in EconPapers)
Pages: 30 pages
Date: 2015-12
New Economics Papers: this item is included in nep-cba, nep-mac and nep-mon
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (1)

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http://www.sheffield.ac.uk/economics/research/serps/articles/2015_025 First version, December 2015 (application/pdf)

Related works:
Journal Article: Inflation targeting or exchange rate targeting: Which framework supports the goal of price stability in emerging market economies? (2018)
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Persistent link: https://EconPapers.repec.org/RePEc:shf:wpaper:2015025

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