Inflation targeting by debtor central banks in emerging market economies

Arbeitspapier

Given buoyant capital inflows and managed exchange rates the majority of emerging market central banks have continued to accumulate massive foreign reserves. If left unsterilized, the liquidity expansion can threaten domestic macroeconomic stability. To contain domestic inflation these central banks absorb rather then provide liquidity in their regular monetary policy operations. Based on an augmented Barro-Gordon framework we show that inflation targeting within an environment of surplus liquidity is less efficient, because absorbing liquidity raises the costs of monetary policy operations. By implementing sterilization costs into the central bank's objective function the inflation bias increases.

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• Language: Englisch

References and Relationships

• Bibliographic citation: Series: CESifo Working Paper ; No. 3138

Classification and Topics

• Classification: Wirtschaft ; Monetary Policy ; Central Banks and Their Policies
• Subject: inflation targeting ; exchange rate targeting ; sterilization ; debtor central bank ; Inflation Targeting ; Wechselkurspolitik ; Geldpolitik ; Kapitalimport ; Währungsreserven ; Gesamtwirtschaftliche Liquidität ; Aufstrebende Märkte ; Theorie

Contributors, Places and Time

• Event: Geistige Schöpfung
• (who): Löffler, Axel ; Schnabl, Gunther ; Schobert, Franziska
• Event: Veröffentlichung
• (who): Center for Economic Studies and ifo Institute (CESifo)
• (where): Munich
• (when): 2010

Further information

• Handle: http://hdl.handle.net/10419/39060