Inflation Targets and Flexible Exchange Rates in Emerging Economies

This article examines the feasibility of an inflation-targeting regime combined with a flexible exchange rate in emerging economies, arguing that such an approach can serve as a robust monetary policy strategy. Using a theoretical model, we explore the characteristics of emerging economies that adopt this regime, recognizing the need for an independent central bank and a sustainable fiscal policy. The analysis focuses on the experience of countries such as Brazil, Chile, and the Czech Republic, noting that concerns about exchange rate instability and its impact on inflation and output may be exaggerated. The results suggest that moderate interventions in the foreign exchange market can be beneficial in crisis situations but should be avoided in the face of permanent shocks. The implications for economic policy include the importance of an effective commitment to inflation control and the ability of central banks to adapt to the changing needs of their economies, especially in the face of financial crises or external shocks. (Abstract and audio: Department of Economic Publications)