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Inflation Targeting And Exchange Rate Volatility In Emerging Markets, Rene Cabral, Francisco G. Carneiro, Andre V. Mollick
Inflation Targeting And Exchange Rate Volatility In Emerging Markets, Rene Cabral, Francisco G. Carneiro, Andre V. Mollick
Economics and Finance Faculty Publications and Presentations
The paper investigates the exchange rate on the reaction function of 24 emerging markets economies’ (EMEs) central banks from 2000Q1 to 2015Q2. This is done by first employing fixed-effects (FE) ordinary least squares and then system generalized methods of the moments techniques. Under FE, the exchange rate is important in the reaction function of EMEs. Allowing for the endogeneity of inflation, output gap, and the exchange rate, the exchange rate remains positive and statistically significant (but quantitatively less) across inflation targeting countries. When the sample is partitioned into targeting and non-targeting countries, the exchange rate remains relevant in the reaction …