The role of exchange rate in inflation targeting: the case of Turkey

AbstractThis paper investigates the PPP and UIP conditions by taking into account possible nonlinearities as well as the role of Taylor rule deviations under alternative monetary policy frameworks. The analysis is conducted using monthly data from January 1993 to December 2020 for five inflation-targeting countries (the UK, Canada, Australia, New Zealand and Sweden) and three non-targeting ones (the USA, the Euro Area and Switzerland). Both a benchmark linear VECM and a nonlinear Threshold VECM are estimated; the latter includes Taylor rule deviations as the threshold variable. The results can be summarized as follows. First, the nonlinear specification provides much stronger evidence for the PPP and UIP conditions, the estimated adjustment speed towards equilibrium being twice as fast. Second, Taylor rule deviations play an important role: the adjustment speed is twice as fast when deviations are small and the credibility of the central bank is higher. Third, inflation targeting tends to generate a higher degree of credibility for the monetary authorities, thereby reducing deviations of the exchange rate from the PPP- and UIP-implied equilibrium.

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Inflation Targeting in Iran

Asian Finance & Banking Review ◽

10.46281/asfbr.v3i1.296 ◽

2019 ◽

Vol 3 (1) ◽

pp. 74-88

Author(s):

Bijan Bidabad ◽

Nahid Kalbasi Anaraki

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Inflation Targeting ◽

Primary Objective ◽

Natural Rate ◽

Official Exchange Rate ◽

Short Run ◽

Central Bankers ◽

Intermediate Targets

Inflation targeting in various forms has been adopted by a number of countries as a framework for making monetary policy more coherent and transparent and for increasing the credibility of monetary policy. Despite the language, referring to inflation target as the primary objective of monetary policy, central bankers always make room for short-run stabilization objectives, particularly with respect to output and exchange rate. Inflation targeting, in most cases, reduces the role of intermediate targets, such as exchange rate or money growth rate. Experience of other countries that have adopted inflation targeting as a monetary framework reveals that the success of the policy depends on not only the transparency of the operation but also on the budgetary discipline. Indeed, the central banks that have become more transparent, more independent, more coherent, and more accountable and more credible have been more successful. The controversy among economists on the expenses of inflation targeting has attained particular attention during the past decades .While opponents believe that inflation targeting takes place at the expense of output shortfalls (Cechetti and Ehrmann 1999), proponents (Mishkin 2000, Jonas and Mishkin 2003) believe that inflation targeting promotes investment and economic growth. This paper tries to address the question of whether the performance of inflation targeting in Iran has been successful. Based on a monetary model, using exogenous variables such as official exchange rate, budget deficit, foreign exchange obligation account, and balance of payments, the results suggest that the effects of inflation targeting on the real output is trivial, supporting the natural rate hypothesis.

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Fear of Free Floating or Forced Exchange Rate Fixing

Voprosy Ekonomiki ◽

10.32609/0042-8736-2004-6-112-122 ◽

2004 ◽

pp. 112-122

Author(s):

O. Osipova

Keyword(s):

Exchange Rate ◽

Financial Crisis ◽

Exchange Rates ◽

Inflation Targeting ◽

Exchange Rate Policy ◽

Float Exchange Rate ◽

Floating Exchange Rate ◽

Rate Policy ◽

Exchange Rate Arrangements ◽

Pass Through

After the financial crisis at the end of the 1990 s many countries rejected fixed exchange rate policy. However actually they failed to proceed to announced "independent float" exchange rate arrangement. This might be due to the "fear of floating" or an irreversible result of inflation targeting central bank policy. In the article advantages and drawbacks of fixed and floating exchange rate arrangements are systematized. Features of new returning to exchange rates stabilization and possible risks of such policy for Russia are considered. Special attention is paid to the issue of choice of a "target" currency composite which can minimize external inflation pass-through.

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Exchange Rate Regimes and Economic Stability

Voprosy Ekonomiki ◽

10.32609/0042-8736-2010-1-29-43 ◽

2010 ◽

pp. 29-43

Author(s):

S. Smirnov

Keyword(s):

Exchange Rate ◽

Inflation Targeting ◽

Exchange Rate Regime ◽

Exchange Rate Policy ◽

Real Sector ◽

Economic Stability ◽

Exogenous Shocks ◽

Floating Exchange Rate ◽

Rate Policy ◽

Managed Floating

The Bank of Russia intends to introduce inflation targeting policy and exchange rate free floating regime in three years. Exogenous shocks absorption which stabilizes the real sector of economy is usually considered to be one of the advantages of free floating exchange rate policy. However, our research based on the analysis of 25 world largest economies exchange rates and industrial production during the crisis of 2008-2009 does not confirm this hypothesis. The article also analyzes additional risks associated with free floating exchange rate regime in Russia and presents some arguments in favor of managed floating exchange rate regime.

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On the Exchange Rate Policy

Voprosy Ekonomiki ◽

10.32609/0042-8736-2010-1-21-28 ◽

2010 ◽

pp. 21-28

Author(s):

K. Yudaeva

Keyword(s):

Monetary Policy ◽

Exchange Rate ◽

Inflation Targeting ◽

Exchange Rate Policy ◽

Institutional Changes ◽

Crisis Period ◽

Local Currency ◽

High Inflation ◽

Rate Policy ◽

The Exchange Rate

The level of trust in the local currency in Russia is very low largely because of relatively high inflation. As a result, Bank of Russia during crisis times can not afford monetary policy loosening and has to fight devaluation expectations. To change the situation in the post-crisis period Russia needs to live through a continuous period of low inflation. Modified inflation targeting can help achieve such a result. However, it should be amended with institutional changes, particularly development of hedging instruments.

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At the final stage of the global crisis: Economic tasksin 2017-2019

Voprosy Ekonomiki ◽

10.32609/0042-8736-2018-3-5-29 ◽

2018 ◽

pp. 5-29 ◽

Cited By ~ 7

Author(s):

V. A. Mau

Keyword(s):

Economic Growth ◽

Final Stage ◽

Government Regulation ◽

Inflation Targeting ◽

Social Dynamics ◽

Growth Stimulation ◽

Central Banks ◽

Economic Area ◽

National Trends

The paper deals with the global and national trends of economic and social development at the final stage of the global structural crisis. Special attention is paid to intellectual challenges economists will face with in the post-crisis world: prospects of growth without inflation, new global currencies and the role of cryptocurrencies, central banks independence and their role in economic growth stimulation, new tasks and patterns of government regulation, inequality and growth. Special features of Russian post-crisis development are also under consideration. Among them: prospects of macroeconomic support of growth, inflation targeting, new fiscal rule, social dynamics and new challenges to welfare state. The paper concludes that the main obstacles for economic growth in Russia are concentrated in the non-economic area.

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