Inflation Targeting And Exchange Rate Regime

With apparent advantages compared with other nominal anchors, Inflation TargetingFramework (IT) has experienced rapid growth in the world. Ex post facto analysisarrives at several results. The proportion of the countries with flexible exchange rateregimes that have implemented IT is increasing. More and more countries that haveimplemented IT have introduced MF. For those countries wishing to exercise flexibleexchange rate regimes, the introduction of IT can provide appropriate nominalanchors.In these emerging markets with IT, central banks should exercise foreign exchangeinterventions because of pass-through effect from exchange rate to price and othernegative impacts of exchange rate fluctuations. Usually, central banks have two kindsof interventions, which are direct means and indirect means. They are of mutuallycomplementary relations. In actual operations, exchange rate over-shooting is asufficient condition but not necessarily necessary condition.In order to put some restrictions on central banks' foreign exchange interventions andmaintain the credibility of IT and central banks, central banks should keep certaintransparency to the markets and explain why the interventions are necessary andreasonable, illuminate the time limits, funding sources and so on.It should be emphasized that the aim of interventions under IT is only to eliminate theexcess fluctuations and smooth the trends of exchange rates and not to change thetrends. From this point of view, according to the experience of emerging markets, theforeign exchange interventions are basically successful. On the contract, when the aimof interventions is to prevent the appreciation/depreciation, the effectiveness seemsamphibolous. Besides, the anticipation of markets plays an important role in thevalidity.