The Role of the Exchange Rate in Inflation-Targeting Emerging Economies (original) (raw)

This is an excerpt from a forthcoming IMF Occasional Paper titled The Role of the Exchange Rate in Inflation-Targeting Emerging Economies. This paper explores the role of exchange rates in emerging economies with inflationtargeting regimes, an issue that has become especially germane during the current episode of financial turmoil and volatile capital flows. Under inflation targeting, the interest rate is the main monetary policy tool for influencing activity and inflation, and there is little agreement about the appropriate role of the exchange rate. The exchange rate is a more important monetary policy tool for emerging economies that have adopted inflation targeting than it is for inflation-targeting advanced economies. However, their sharper focus on the exchange rate may cause some confusion about the commitment of their central banks to achieve the inflation target and may also complicate policy implementation. The full paper will be published in early 2009, and the contents of the forthcoming paper are included at the end of this excerpt.