Please use this identifier to cite or link to this item: https://hdl.handle.net/10419/121058 
Year of Publication: 
2010
Series/Report no.: 
FIW Working Paper No. 57
Publisher: 
FIW - Research Centre International Economics, Vienna
Abstract: 
The aim of this paper is to empirically examine the effect of a regime switch, from exchange-rate targeting (fixed exchange rate) to inflation targeting, on monetary policy in developing economies, hence adding to evidence on whether inflation targeting along with a managed float provides a better monetary policy compared to exchange-rate targeting. For this purpose, a group of developing countries that have historically experienced such a switch is analysed. This is done by an augmented interest-rate rule a-la Taylor (1993; 2001). Two methodological approaches are used: switching regression and Markov-switching method. Although both approaches have different drawbacks which compensate, still both lead to the conclusion that inflation targeting represented a real switch in developing countries. The period of inflation targeting was characterized by: a more stable economic environment; by more independent monetary-policy conduct; and by strict focus on inflation. Estimates suggest that the switch to a new monetary regime explains these results.
Subjects: 
inflation targeting
exchange-rate targeting
monetary regime switch
developing economies
JEL: 
F41
E42
Document Type: 
Working Paper

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