iMFdirect – The IMF Blog

It is often claimed that inflation targeting , to be successful, needs to include a high degree of exchange rate flexibility, with the policy rate geared to stabilizing inflation and the exchange rate allowed to fluctuate freely. But a new paper from the IMF examines the case for using two policy instruments—the policy interest rate and sterilized foreign exchange market intervention—in emerging market countries aiming to maintain low inflation while avoiding the damage that large and abrupt currency movements may engender. It argues that in a world of volatile capital movements, and sharp ups and downs in exchange rates, there are important benefits to making use of all available policy instruments, both from a single country’s perspective, and from a global standpoint. Provided policymakers are clear about their objectives, there is no conflict between an inflation targeting framework and making use of the foreign exchange market intervention instrument to attenuate deviations of exchange rates.

Filed under: Economic Crisis, Economic research, Emerging Markets, Finance, Financial Crisis, Financial regulation, Financial sector supervision, Globalization, IMF, International Monetary Fund, Public debt, recession | Tagged: Atish Ghosh, foreign exchange intervention, FX, iMFdirect blog, inflation targeting, Jonathan Ostry, macroprudential regulations, Marcos Chamon | 3 Comments »