اهداف تورم منعطف، مداخلات فارکس و نوسانات نرخ ارز در کشورهای در حال توسعه

Emerging economies with inflation targets (IT) face a dilemma between fulfilling the theoretical conditions of “strict IT”, which imply a fully flexible exchange rate, or applying a “flexible IT”, which entails a de facto managed-floating exchange rate with foreign exchange (forex) interventions to moderate exchange rate volatility. Using a panel data model for 37 countries we find that, although IT lead to higher exchange rate instability than alternative regimes, forex interventions in some IT countries have been more effective to lower volatility than in non-IT countries, which may justify the use of “flexible IT” by policymakers.

Since New Zealand adopted an inflation target (IT hereafter) in 1990, an increasing number of countries have implemented this monetary policy framework. According to IMF (2005) and Little and Romano (2009), 18 emerging countries (EMEs onwards) have changed their exchange rate regime, from fixed to floating, and their nominal anchor, from exchange rate to inflation. See Table 1 for a summary of IT adoption dates in EMEs. Although the effectiveness of IT to lower the inflation level and volatility still remains controversial,1 this framework has been more durable than other monetary policy strategies (Mihov and Rose, 2008). One of the main reasons for this is that IT countries have benefited from the credibility gains from explicitly announcing the target, which helped to anchor and lower inflation expectations (Mishkin and Schmidt-Hebbel, 2007).2A flexible nominal exchange rate constitutes, at least from a theoretical standpoint, a requirement for a well functioning full-fledged IT regime (Mishkin and Savastano, 2001). Its rationale is based on the policy dilemma of the “impossibility of the Holy Trinity”, as in a context of capital mobility, an independent monetary policy cannot be combined with a fixed exchange rate or a peg to another currency through interventions in the foreign exchange markets (forex interventions onwards); see Obstfeld et al. (2005). Some economists state that one of the costs of IT is precisely the higher volatility of exchange rates as a result of the floating exchange rate regime, which can entail negative effects of particular relevance for EMEs given their greater financial and real vulnerabilities (Cavoli, 2009). In fact, this is the basis of the “fear of floating” (Calvo and Reinhart, 2002), which is a phenomenon mostly associated to EMEs.3 Accordingly, during economic booms EMEs also experience “fear of appreciation” given their concerns for their loss of competitiveness (Levy-Yeyati and Sturzenegger, 2007). Thus, exchange rate monitoring under IT poses some challenges for EMEs that differ from those in advanced economies. This might justify the more active role of their exchange rate policies, particularly in those countries where the exchange rate has previously played a key role as nominal anchor, despite the theoretical reservations about it. Consequently, in practice, EMEs with IT generally have less flexible exchange rate arrangements, intervene more frequently in foreign exchange markets than their advanced economy counterparts and have a greater response to real exchange rate movements (see Aizenman et al., 2008 and Chang, 2008).4 This adaptive way of implementing IT, also known as “flexible IT”, has generated an intense debate about its validity and viability in EMEs, compared with “strict or pure IT”, where the exchange rate does not enter in the reaction function of central banks.5 That is, implicitly there is a policy dilemma between fulfilling the theoretical requirements of IT and strictly following it, or applying a “flexible IT”, in the sense of using forex interventions to reduce exchange rate volatility. To this respect, there are different views in the literature. On the one hand, some authors like Bernanke et al. (1999) hold that attending to an IT and reacting to the exchange rate are mutually exclusive as forex interventions could confuse the public about the priorities of the central bank, which distorts expectations. On the other hand, other authors argue that central banks might interfere with the exchange rate volatility. According to this view, forex interventions would be fully justified, as far as EMEs need to maintain stable and competitive real exchange rates (Cordero, 2009). In fact, following Taylor (2000), some authors include the exchange rate in the policy reaction function arguing that it helps to mitigate the impact of shocks, by dampening exchange rate volatility (Kirnasova et al., 2006 and Cavoli, 2008). Other papers reach halfway conclusions about the role of exchange rates in IT regimes from a more theoretical point of view. Stone et al. (2009) show that it depends on the structure of the economy, the nature of the shocks, and the way in which the exchange rate enters the policy rule. In the same line, Parrado (2004) finds that the social loss is much higher under “flexible IT” than under “strict IT” for real and external shocks, while for nominal shocks the opposite holds. On the contrary, Yilmazkuday (2007) concludes with a calibrated model for Turkey that the welfare loss function is minimized under “flexible IT” for all types of shocks. Finally, Roger et al. (2009) estimate a DSGE model and find that financially vulnerable EMEs are especially likely to benefit from some exchange rate smoothing given the perverse impact of exchange rate movements on activity. In line with this debate, the main objective of our paper is to empirically analyze the relationship between IT, forex interventions and exchange rate volatility. That is, we analyze if there is any difference in terms of exchange rate volatility between the use of forex interventions in IT and non-IT countries. In other words, we want to analyze if the “fear of floating” and “fear of appreciating” behavior of some central banks may justify halfway policies between the fixed and fully floating, such as the “flexible IT”, which, in practice, is the most frequent way of EMEs to implement IT. Our study of the link between these three variables is based on a panel data model for 37 IT and non-IT EMEs from 1995:Q1 to 2010:Q1. Note that we cover the last financial crisis, whose effects on the link between IT adoption, forex interventions and exchange rate volatilities have not been analyzed in detail yet (for an exception, see de Carvalho, 2010). This crisis constitutes a natural experiment to test these relations in turbulent periods (Habermeier et al., 2009), as the relatively more important role of the exchange rate policy in EMEs with IT than in developed ones became clear. Thus, once we analyze the panel for the whole sample period, we also replicate our analysis for the time previous to the onset of the financial crisis and the subsequent subsample. We date the beginning of the crisis in 2008:Q3, as from that moment the financial crisis translates to the exchange rates of almost all EMEs, which strongly depreciated. We conclude that, although IT leads to higher exchange rate volatility than alternative regimes, the forex interventions performed by some IT countries, mainly in Latin America, have been more effective to lower the exchange rate volatility than those of non-IT countries, especially after the onset of the crisis. Thus, our results support the implementation of “flexible IT” by policymakers, as forex interventions under IT seem to be even more effective than those of non-IT countries in mitigating the exchange rate volatility. This outcome represents an additional argument in favor of IT, which have demonstrated to be sustainable during the crisis. The paper is organized as follows. After the introduction, Section 2 briefly displays the empirical literature and Section 3 describes the data set, including our three main variables of interest, exchange rate volatility, forex interventions and a dummy variable that captures the fact of having an IT. Then, Section 4 presents the methodology that will be used to analyze the panel data set. In Section 5, we report the main empirical findings. Finally, Section 6 concludes the paper.

In this paper we have analyzed empirically the link between exchange rate volatility, IT and forex interventions. In practice most central banks with IT implement their monetary policy with some form of price stabilization objective, while managing their currency movements (“flexible IT”), so that these forex interventions might have implications for monetary policy and the use of policy rules. In this sense, “flexible IT” imply a departure from the corner solutions derived from the “impossibility Holy Trinity” of fixed exchange rates, independent monetary policy and perfect capital mobility and have several broad implications for the role of exchange rates in IT countries. To analyze this question we estimate a panel data model for 37 IT and non-IT EMEs. We study the impact of IT adoption and foreign reserve movements—that we interpret as forex interventions—on the exchange rate volatility. We also perform this analysis for the period previous to the onset of the financial crisis and the subsequent subsample. This exercise is useful to disentangle if IT does make a difference in terms of the impact of forex interventions on the exchange rate volatility. We confirm that exchange rates are more volatile under IT than under other regimes, in line with De Gregorio et al. (2005) and Edwards (2007), which is rather sensible given that, in principle, their exchange rate regime is more flexible. However, we also show that forex interventions in IT countries do play a useful role in containing the exchange rate volatility, especially negative interventions (sales of foreign reserves). This outcome is particularly significant after the onset of the recent financial crisis in Latin America. Surprisingly, this role of negative forex interventions in the moderation of the exchange rate volatility is not identified in non-IT countries. All in all, we support the view that there is some scope for EMEs that have adopted IT to interpret the implementation of their IT mechanisms with certain degree of flexibility. Thus, “flexible IT” regimes are not only sustainable, but also forex interventions performed under this scheme are even more effective than those of non-IT countries in mitigating extreme volatility periods. However, there is still some room for future research to analyze if these episodes of heavy forex interventions have not undermined the credibility of these central banks.