THE ROLE OF EXCHANGE RATES IN MONETARY POLICY RULE: THE CASE OF INFLATION TARGETING COUNTRIES

Yıl 2011, Cilt: 3 Sayı: 2, 181 - 192, 01.12.2011

Mahir Binici

Öz

This paper examines two main issues for the case of inflation targeting countries.
The first is to investigate whether monetary authorities react to the exchange rate
movements, in addition to inflation and output gap, as in simple monetary policy
rule. The second is to investigate whether reactions to the exchange rates have any
implications for the inflation targeting performance. The main result of the
analysis indicates that some inflation targeting countries react to the exchange rate
movements. The policy to stabilize the exchange rate movements helps achieve
the inflation target; however, this is not robust across different specifications. In
contrast, the real exchange rate variability worsens the inflation targeting
performance. The other main finding from the panel data model is that the
deviation of the inflation from the target rate exhibits a high and systematic
persistence. Additionally, central banks with constant inflation targeting are more
successful controlling inflation in the target path compared to banks with a nonconstant
inflation target. Finally, restriction on capital controls helps the inflation
targeting performance.

Anahtar Kelimeler

Monetary policy rules, Exchange rates, Inflation targeting, GMM, Panel data

Kaynakça

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