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Gauging exchange rate targeting

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  • Parsley, David
  • Popper, Helen

Abstract

In this paper, we examine whether a monetary authority targets the exchange rate, per se, or instead simply appears to do so as it responds to the exchange rate and other variables in service to inflation and output targets. We combine data-rich estimation with a system of forward-looking equations in order to disentangle the possibilities. The combined approach reveals the potentially misleading nature of standard estimates of the extent of exchange rate and inflation targeting. We illustrate the approach by applying it to two de jure inflation targetters, Canada and Korea. In contrast to standard methods and much past work, we find that neither country targets its exchange rate; and, both are bona fide inflation targetters.

Suggested Citation

  • Parsley, David & Popper, Helen, 2014. "Gauging exchange rate targeting," Journal of International Money and Finance, Elsevier, vol. 43(C), pages 155-166.
    • Handle: RePEc:eee:jimfin:v:43:y:2014:i:c:p:155-166
    DOI: 10.1016/j.jimonfin.2014.01.002
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    More about this item

    Keywords

    Exchange rates; Exchange rate management; Monetary policy rule; Inflation targeting; Exchange rate regimes; Exchange rate classification; Factor instrumental variables; Data-rich estimation;
    All these keywords.

    JEL classification:

    • F4 - International Economics - - Macroeconomic Aspects of International Trade and Finance

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