Version 1
: Received: 22 March 2024 / Approved: 22 March 2024 / Online: 25 March 2024 (07:53:38 CET)
How to cite:
Tipoy, C.K. Do Central Banks Respond to Exchange Rate Movements? A Structural Analysis of Selected Inflation Targeters Emerging Economies. Preprints2024, 2024031409. https://doi.org/10.20944/preprints202403.1409.v1
Tipoy, C.K. Do Central Banks Respond to Exchange Rate Movements? A Structural Analysis of Selected Inflation Targeters Emerging Economies. Preprints 2024, 2024031409. https://doi.org/10.20944/preprints202403.1409.v1
Tipoy, C.K. Do Central Banks Respond to Exchange Rate Movements? A Structural Analysis of Selected Inflation Targeters Emerging Economies. Preprints2024, 2024031409. https://doi.org/10.20944/preprints202403.1409.v1
APA Style
Tipoy, C.K. (2024). Do Central Banks Respond to Exchange Rate Movements? A Structural Analysis of Selected Inflation Targeters Emerging Economies. Preprints. https://doi.org/10.20944/preprints202403.1409.v1
Chicago/Turabian Style
Tipoy, C.K. 2024 "Do Central Banks Respond to Exchange Rate Movements? A Structural Analysis of Selected Inflation Targeters Emerging Economies" Preprints. https://doi.org/10.20944/preprints202403.1409.v1
Abstract
We analyze whether the central banks of a selected sample of emerging economies respond to exchange rate movements. We use economies that are inflation targters and exporters of a limited number of commodities. The latter renders them vulnerable to terms of trade shocks. The sample comprises Brazil, the Czech Republic, India, Indonesia, Russia and South Africa. We also investigate the role played by the terms of trade in explaining their business cycles. We estimate, for each economy separately and using Bayesian techniques, a regime switching open new Keynesian model. This model allows the parameters of the policy rule and the structural shocks to switch between periods of low and high regimes. We perform posterior simulation and find that, when compared to a constant parameters model, the regime switching fits the data better. The results indicate that, in some periods, the different economies respond strongly to exchange rate, while in others, some respond weakly. A terms of trade improvement leads to a currency appreciation. However, this is reversed for those economies that respond strongly to exchange rate movements. This leads to a rise in output and inflation even for economies that do not respond strongly but play a major role in international trade. This is the case of Russia. The terms of trade are found to play a major rule in explaining business cycles in emerging economies. Thus, although these economies follow an inflation targeting framework, they may set their respective policy rate in a manner to take into account exchange rate developments. This insulates themselves against adverse terms of trade shocks.
Copyright:
This is an open access article distributed under the Creative Commons Attribution License which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.
