International Journal of Econometrics and Financial Management
ISSN (Print): 2374-2011 ISSN (Online): 2374-2038 Website: https://www.sciepub.com/journal/ijefm Editor-in-chief: Tarek Sadraoui
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International Journal of Econometrics and Financial Management. 2013, 1(1), 5-13
DOI: 10.12691/ijefm-1-1-2
Open AccessArticle

Inflation Targeting and the Dynamics between Exchange Rates and Interest Rates: Evidence from Latin America

Yongli Luo1,

1Wayland Baptist University, School of Business, Plainview, Texas, U.S.A

Pub. Date: December 03, 2013

Cite this paper:
Yongli Luo. Inflation Targeting and the Dynamics between Exchange Rates and Interest Rates: Evidence from Latin America. International Journal of Econometrics and Financial Management. 2013; 1(1):5-13. doi: 10.12691/ijefm-1-1-2

Abstract

To ensure financial market stabilities, many Latin America countries implemented pure floating and inflation targeting (FIT) policies following the IMF’s suggestions. The effectiveness of such policies is under investigation. This paper examines the long-run relationship between the real exchange rates (RERs) and real interest rate(RIR) differentials in major Latin America countries over 1993-2009. It shows there are long-run cointegrations between the RERs and RIR differentials in Argentina, Chile and Columbia, as well as long-run causal relationships in Brazil, Mexico and Venezuela. The results support that the FIT regime has facilitated the regional money market and currencies stabilizations in Latin America. The findings have important implications for policy makers and international investors in emerging markets.

Keywords:
exchange rate interest rate cointegration Granger causality Latin America

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