The role of the exchange rate in the conduct of monetary policy in emerging economies

Bui, Thanh Trung (2022) The role of the exchange rate in the conduct of monetary policy in emerging economies. HUNGARIAN STATISTICAL REVIEW, 5 (2). pp. 82-106. ISSN 2630-9130

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Abstract

The Taylor rule is an important formula for studying the behaviour of the central bank. However, the high external exposure of emerging economies requires modification. This study investigates the exchange rate in the reaction function of monetary policy in emerging economies following inflation targeting. Unlike previous studies, we consider the effect of global financial crisis, the asymmetric effect of exchange rate, and measurement sensitivity. We used the GMM model to investigate various augmented Taylor rules. This study finds that the fear of floating emerges in most emerging economies and is more pronounced during the post-crisis period. Furthermore, there is strong evidence for fear of appreciation, especially against the main currencies of international transactions, such as the US dollar or the euro. Finally, the measurement sensitivity analysis suggests that the fear of floating or appreciation emerges strongly with the monthly deviation of the exchange rate.

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