Inflation targeting in advanced vs. emerging economies before and after the crisis

In: Panoeconomicus: naučno-stručni časopis Saveza Ekonomista Vojvodine ; scientific-professional journal of Economists' Association of Vojvodina, Band 61, Heft 1, S. 79-106

Abstract

Emerging economies have specificities which distance them compared to
advanced economies in practicing inflation targeting (IT) monetary regime.
One of the main differences in performing IT in advanced compared to
emerging economies is ?fear of floating? problem in emerging group. However,
on the road from exchange rate (ER) as a nominal anchor to IT, differences
between advanced and emerging economies concerning ?fear of floating? have
been more or less narrowed. In this paper we are concentrated to selected
aspects of ER pass-through to prices and output, as well as (in)direct
monetary policy reactions to ER shocks, trying to find out is significant
difference observable between advanced and emerging IT countries in
pre-crisis period and (post)crisis period. The comparison is made on the
basis of forecast error variance decompositions from estimated Vector
Autoregression (VAR) / Vector Error Correction (VEC) models. ?Fear of
floating? phenomenon should not be exclusively applied to emerging
economies, especially in the crisis period burdened with external shocks.
The role of ER in IT monetary framework is strengthened with higher internal
vulnerability to ER shocks, despite the level of economic development.
Advanced countries more use interest rate as an indirect way to withstand ER
shocks, while emerging economies more use direct way via foreign exchange
interventions to withstand the ER shocks.