Inflation targeting in emerging economies : an empirical assessment

This doctoral thesis consists of three chapters which are focused on the analysis of monetary policy in emerging economies. In particular, Chapter 2 measures the output cost of disinflation namely, the sacrifice ratio (SR) for emerging economies with and without Inflation Targeting (IT). Three alternative approaches are adopted: first, disinflationary episodes are identified for individual countries. Second, aggregate supply curves are estimated. Third, a structural VAR model is employed. The results suggest that for countries where the process of disinflation has been accompanied by the implementation of IT, lower and more stable levels of inflation can be achieved. Furthermore, sacrifice ratios have increased as the level of inflation decreases. In Chapter 3, the main determinants of monetary policy in Mexico and Israel are analysed. To this end, reaction functions for each country in terms of forward-looking rules are estimated. The results generally suggest that when setting monetary policy, central banks in these countries look beyond just inflation and output. Moreover, movements in the exchange rate seem to play an important role especially in the case of Israel where there is not a clear commitment to price stability. Chapter 4 investigates the impact of exchange rate behaviour on domestic investment in the Mexican Manufacturing Industry within the context of IT. Standard investment equations are utilised to analyse the role of the level and volatility of exchange rates on investment. The results support the view that a depreciation of the exchange rate has a positive effect through the export channel. Volatility also matters and its effect is mainly observed in those sectors that rely more on exports. Differences are observed within different competitive markets.