Premium
Terms of Trade Shocks and Inflation Targeting in Emerging Market Economies
Author(s) -
Hove Seedwell,
Touna Mama Albert,
Tchana Tchana Fulbert
Publication year - 2016
Publication title -
south african journal of economics
Language(s) - English
Resource type - Journals
SCImago Journal Rank - 0.502
H-Index - 31
eISSN - 1813-6982
pISSN - 0038-2280
DOI - 10.1111/saje.12086
Subject(s) - economics , exchange rate , monetary economics , inflation targeting , commodity , emerging markets , monetary policy , inflation (cosmology) , robustness (evolution) , terms of trade , international economics , macroeconomics , market economy , biochemistry , chemistry , physics , theoretical physics , gene
Emerging market economies ( EMEs ) have persistently experienced different waves of commodity terms of trade disturbances, generating macroeconomic instabilities. The adoption of inflation targeting ( IT ) by many EMEs has raised questions about its relative suitability in dealing with these shocks compared with other monetary policy regimes. This paper tests the robustness of IT compared with monetary targeting and exchange rate targeting regimes in coping with commodity terms of trade shocks using the panel vector autoregressive technique. The results show that in general, IT countries respond better to commodity terms of trade shocks especially with respect to inflation and output gap. However, exchange rates are more volatile in IT countries than in exchange rate targeting countries. The results suggest that EME countries can reduce the adverse effects of commodity terms of trade fluctuations when they adopt IT , but they also need to pay attention to exchange rate movements.