What to Target?Inflation or Exchange Rate

Southern Economic Journal; Apr2012, Vol. 78 Issue 4, p1202-1221, 20p

*haichunye@gmail.com

ABSTRACT

This study empirically compares, for the first time, the popular exchange-rate-targeting regime with the recently emerged inflation-targeting framework in developing countries. Applying a variety of propensity score matching methods and dynamic panel generalized method of moments (GMM) regressions to a sample of 50 developing countries for the years 1990-2006, we find strong and robust evidence that, compared to exchange-rate targeting, inflation targeting leads to a significantly lower inflation rate, and the lower inflation rate does not come at a cost of slower growth.