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Infation Targeting matters! - Novel evidence from 'ex ante' Taylor rules in emerging markets

Ralf Fendel, Michael Frenkel and Jan-Christoph Rülke

No 08-02, WHU Working Paper Series - Economics Group from WHU - Otto Beisheim School of Management

Abstract: Proponents of infation targeting argue that such a strategy directly infuences expectation formation processes in financial markets. This paper provides a novel test for the evidence that financial market expectations are formed differently under inflation targeting regimes. Using forecasts for the short-term interest rate, the inflation rate, and output growth for ten emerging markets in Latin-America, central and eastern Europe out of which six economies are inflation targeting economies we estimate expected Taylor-type rules. We find evidence for differences in the expectation formation process in the sense that the well-known Taylor principle fairly holds for countries which adopt an inflation targeting system, while for the other countries it does not.

Keywords: Taylor rule; expectation formation; inflation targeting (search for similar items in EconPapers)
JEL-codes: E52 D84 C33 (search for similar items in EconPapers)
Date: 2008-08
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