Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries (original) (raw)

Emerging economies with infl ation targets (IT) face a dilemma between fulfi lling the theoretical conditions of "strict IT", which imply a fully fl exible exchange rate, or applying a "fl exible IT", which entails a de facto managed fl oating exchange rate with FX interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we fi nd that, although IT lead to higher exchange rate instability than alternative regimes, FX interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of "fl exible IT" by policymakers.