Skip to main content

velasco93_Panuwat Sikham Getty Images_digitalworldmoneytransfer Panuwat Sikham/Getty Images

Dirty Floating in Emerging Markets

Central banks are supposed to use the interest rate to achieve an inflation target and let the exchange rate float freely. So why do they often intervene in currency markets by buying and selling international reserves, and use a host of other measures to limit their currencies’ volatility?

LONDON – Say one thing and then do something else. That pretty much sums up current orthodoxy in emerging economies regarding exchange-rate management. Countries are supposed to use the interest rate to achieve an inflation target and let the exchange rate float freely. In practice, Asian and Latin American central banks often intervene in currency markets by buying and selling international reserves, and use a host of other measures to limit their currencies’ volatility.

That exchange-rate make-believe will be harder to keep up after a landmark speech last week by Agustín Carstens, General Manager of the Bank for International Settlements (BIS), at the School of Public Policy at the London School of Economics. In the past, the BIS has been regarded as a bastion of orthodoxy. But now the BIS is arguing that orthodoxy should be updated. Markets are bound to listen.

Inflation targeting can claim important achievements, which Carstens duly listed. It has helped bring inflation rates down in most emerging markets. It has also helped reduce what economists call exchange-rate pass-through – the immediate impact of exchange-rate depreciations on domestic inflation.

We hope you're enjoying Project Syndicate.

To continue reading, subscribe now.

Subscribe

Get unlimited access to PS premium content, including in-depth commentaries, book reviews, exclusive interviews, On Point, the Big Picture, the PS Archive, and our annual year-ahead magazine.

https://prosyn.org/AKLEuD3;
  1. reinhart39_ Sha HantingChina News ServiceVisual China Group via Getty Images_jerome powell Sha Hanting/China News Service/Visual China Group via Getty Images

    Jerome Powell’s Dilemma

    Carmen M. Reinhart & Vincent Reinhart

    There is a reason that the US Federal Reserve chair often has a haunted look. Probably to his deep and never-to-be-expressed frustration, the Fed is setting monetary policy in a way that increases the likelihood that President Donald Trump will be reelected next year.

    3

Cookies and Privacy

We use cookies to improve your experience on our website. To find out more, read our updated Cookie policy, Privacy policy and Terms & Conditions