Inflation Targeting or Fear of Floating in Disguise: The Case of Mexico

International Journal of Finance & Economics, Vol. 9, No. 1, pp. 49-69, 2004

Posted: 24 May 2011

See all articles by Christopher P. Ball

Christopher P. Ball

Quinnipiac University

Javier A. Reyes

University of Arkansas - Sam M. Walton College of Business

Date Written: 2004

Abstract

This paper uses simple analytics to show the similarities and differences between inflation targeting and fear of floating in emerging markets. The analytics provide well-defined predictions for the behaviour of exchange rates and relevant monetary variables under both regimes. This allows us to distinguish clearly one regime from another and empirically test whether or not a country that targets inflation also exhibits a fear of floating.

We analyse the recent experience in Mexico where the authorities now claim to be following an inflation targeting regime. Mexico is also one of the countries claimed to exhibit a fear of floating. Using data from Banco de Mexico, we first confirm that by standard measures Mexico exhibits fear of floating. Second, we show that Mexico is inflation targeting and discuss the relationship and test for a distinction between the two. Finally, we conclude by discussing our results and their implications for other emerging market inflation targeters.

Keywords: Inflation Targeting, Fear of Floating, Exchange Rate, Fixed Exchange Rates, Flexible Exchange Rates

JEL Classification: E47, E52, E58, F31, F33

Suggested Citation

Ball, Christopher P. and Reyes, Javier A., Inflation Targeting or Fear of Floating in Disguise: The Case of Mexico (2004). International Journal of Finance & Economics, Vol. 9, No. 1, pp. 49-69, 2004, Available at SSRN: https://ssrn.com/abstract=1846729

Christopher P. Ball

Quinnipiac University ( email )

275 Mt. Carmel Avenue
Hamden, CT 06518
United States

Javier A. Reyes (Contact Author)

University of Arkansas - Sam M. Walton College of Business ( email )

2 East Center Street
University of Arkansas
Fayetteville, AR 72701
United States
479-575-6079 (Phone)

HOME PAGE: http://economics.uark.edu/directory.php?id=reyes

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