Inflation targeting or exchange rate targeting: Which framework supports the goal of price stability in emerging market economies?

Abstract

The paper investigates and compares the relationship between inflation and inflation uncertainty under inflation targeting and, alternatively, a conventional fixed exchange rate system, for a group of emerging countries. To do so we estimate GARCH in mean models and we find that there is a bi-directional relationship between inflation and inflation uncertainty under the two monetary regimes. It is also found that the fixed exchange rate regime has no impact on average inflation and inflation inertia, while inflation targeting has been successful at lowering both average inflation and inflation persistence.