Inflation Targeting And Exchange Rate Intervention

Since1990, New Zealand adopted inflation targeting, inflation targeting in the theory and practice has make a great development. A number of theoretical studies have shown the advantages of inflation targeting in the stabling of inflation expectations, reducing inflation and output volatility. In practice, the implementation of the inflation targeting generally helps achieving price stability and output growth. More and more countries have begun to abandon the monetary policy framework, and turn to inflation targeting.In the29countries that have adopted the inflation targeting,16countries belong to the emerging market countries. In accordance with the requirements of the standard theory, the implementation of the inflation targeting countries should adopt a free-floating exchange rate system and the Taylor rule interest rate policies. On the one hand, basic theoretical circles that monetary policy does not need to consider the change in the exchange rate, on the other hand, there is the case of many of the central bank to intervene in the exchange rate fluctuations in the monetary policy operations, which means that the theory and practice of out of touch.Firstly, this paper expand the analysis of new Keynesian inflation targeting framework. The foreign exchange market intervention in emerging market countries is a common phenomenon, but popular analytical framework of inflation targeting doesn’t analysis of foreign exchange market intervention within the framework of inflation targeting. To this end, we introduce the assets of the central bank’s balance sheet and foreign exchange market intervention, provide a suitable theoretical model based analysis of the practice of inflation targeting in emerging market countries, which named FXIT framework.This paper focuses on the practice of the four emerging market countries in Asia that have implemented inflation targeting. The analysis pointed out that in South Korea, Thailand, Indonesia, and the Philippines, the central bank put an eye on exchange rate fluctuations in the policy process.A great deal of concern about fluctuations in the exchange rate will affect not only the interest rate policy but also cause the central bank to intervene in the foreign exchange market.We also considered the importance of exchange rate and the effect of echange rate intervention in the emerging market countrices. As we know, there are large differences between emerging market countries and developed countries in terms of economic structure, financial market development, so the exchange rate volatility has an greater impact in emerging market countries. Exchange rate stability is a necessary condition for economic development.In order to analyze the effect of FXIT framework, we constructan emerging-market-country characteristic of dynamic stochastic general equilibrium model, and using Asian countries data carried out the calibration through the simulation analysis the results FXIT framework, and compare the difference with the traditional inflation target system. As we expected, FXIT can effectively reduce the volatility of the exchange rate, and to promote the realization of the inflation target.