The Relationship Between Exchange Rate and Inflation Targeting in Emerging Countries

Abstract

This paper investigates the relationship between exchange rate and inflation targeting regime in six emerging economies which have adopted inflation targeting (IT) regime during the period of 1993M1-2013M7. In this study, we seek to examine how the adoption of inflation targeting influenced exchange rate pass-through (ERPT) and volatility. The empirical evidences suggest that ERPT has declined after IT adoption for both price indexes (consumer and producer prices) for most economies analyzed. Furthermore, our results show that IT regime can reduce exchange rate volatility and inflation volatility in all countries. Thus, the implementation of inflation targeting regime contributes to price stability through the decline of exchange rate pass-through and exchange rate volatility.