Investigating the Relationship between Exchange Rate and Inflation Targeting
نویسنده
چکیده
This paper conducts empirical investigation on the relationship between exchange rate and inflation targeting regime in the three developed and three emerging Asian economies that have adopted inflation targeting (IT) regime. Using a multivariate GARCH model under BEKK specification, we investigate if exchange rate affect the performance of IT and the performance of IT is compared between Asian and European economies. The comparison is made in terms of changes in economic structure and the disinflation cost. The results show significant correlation between exchange rate movements and inflation and output movements in both sub-periods. IT also has significant impacts on the movements of inflation, output and exchange rate. IT leads to higher volatility in exchange rate movement in majority economies. Comparing the performance of IT across economies, we observe that the volatility in exchange rate has increased dramatically and is very volatile in Asian compared to the developed economies. The decline in inflation impulse is larger in Asian than in developed economies. The implementation of IT does not lead to trade-off of inflation-output in Asia but the trade-off relationship is detected in developed economies. 1572 Siok Kun Sek et al
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