TAILIEUCHUNG - Is there Room for Forex Interventions under Inflation Targeting Framework? Evidence from Mexico and Turkey

Similarly, when the Commission gave its revised recommendation for an appropriate fiscal strategy in autumn 2002, deviating from the original dates for achieving a safe budgetary position was conceived by CSFB as bending the Pact, although not breaking it. 9 In contrast, Goldman and Sachs welcomed the change of the proposed Commission strategy as a more realistic target, but it was refuted as still being too restrictive. 10 Towards the end of the year, investment banks mostly saw the rules of the Stability and Growth Pact as being invigorated. The first reason for this was the declaration of an excessive deficit for Portugal, and more importantly, the initiation of such. | Is there Room for Forex Interventions under Inflation Targeting Framework Evidence from Mexico and Turkey by Ilker Domaẹf and Alfonso Mendoza Abstract The salient characteristics of emerging market economies coupled with the increasing adoption of inflation targeting IT in these countries has stimulated much debate about the role of the exchange rate in IT regimes. The paper aims at shedding more light on this issue by investigating whether central bank foreign exchange interventions have any impact on the volatility of the exchange rate in Mexico and Turkey since the adoption of the floating regime. To this end the study using daily data on foreign exchange intervention employs an Exponential GARCH framework. Empirical results suggest that both the amount and frequency of foreign exchange interventions have decreased the volatility of the exchange rates in these countries. The findings corroborate the notion that if foreign exchange interventions are carried out with finesse and sensibly . not to defend a particular exchange rate they could play a useful role under IT framework in containing the adverse effects of temporary exchange rate shocks on inflation and financial stability. Keywords Inflation targeting exchange rate volatility central bank intervention E-GARCH. JEL classification C32 E58 F31 G15 The views expressed in this paper are those of the authors and should not be attributed to the institutions with which they are affiliated. f Corresponding author. Central Bank of Turkey Istiklal Caddesi No 10 Ulus Ankara 06100 Turkey E-mail Address Ị The University of York E-mail Address amv101@ 1. Introduction The successful performance of a number of industrialized countries that adopted inflation targeting IT has rendered this monetary policy strategy an attractive alternative for emerging market economies EMs . Indeed a number of EMs has already instituted IT or some form of this monetary policy framework. The increasing .

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