Cabral, ReneCarneiro, Francisco G.Varella Mollick, Andre2016-07-072016-07-072016-06https://hdl.handle.net/10986/24629The paper investigates the relevance of the exchange rate on the reaction function of the central banks of 24 emerging market economies for the period 2000Q1 to 2015Q2. This is done by first employing fixed-effects ordinary least squares and then system generalized method of the moments techniques. Under fixed effects, the exchange rate is found to be an important determinant in the reaction function of emerging market economies. Allowing for the endogeneity of inflation, output gap, and exchange rate, the exchange rate remains a positive and significant determinant, but less quantitatively relevant across inflation-targeting countries. When the sample is partitioned into targeting and nontargeting countries, the exchange rate remains relevant in the reaction function of the latter group. The results remain robust to splitting the sample at the time of the financial crisis of 2007–09 and suggest that, after the crisis, the central banks of emerging market economies responded only to inflation movements in the interest rate reaction function.en-USCC BY 3.0 IGOGLOBAL FINANCIAL STABILITYMONETARY POLICYCONSUMPTION EXPENDITURESMARKET COUNTRIESDISCRETIONARY POLICIESECONOMIC GROWTHCHECKSMONEY SUPPLIESREAL INTEREST RATESINTERESTMACROECONOMIC MANAGEMENTREAL EXCHANGE RATESASSET PRICESDEBT CRISISCREDIBILITY PROBLEMSEMERGING ECONOMIESINTEREST RATEPRIVATE CREDITOPTIONEXCHANGEMACROECONOMIC POLICYREAL INTERESTINTEREST RATE POLICYINFLATION TARGETINGDOMESTIC INTEREST RATESHIGH INFLATIONDISCOUNTCENTRAL BANK INDEPENDENCEASSET POSITIONSDUMMY VARIABLERESERVECENTRAL BANKSINFLATIONINTERNATIONAL BANKINSTRUMENTSEMERGING MARKET ECONOMIESCREDIBILITYBANK LENDINGCENTRAL BANKINTEREST-RATEEMERGING MARKET COUNTRIESINTERNATIONAL FINANCEPOLICY RESPONSEEXCHANGE RATE MECHANISMSREJECTIONT-BILL RATESCURRENCYEXCHANGE RATE MOVEMENTSRESERVE BANKHOME CURRENCYEXCHANGE RATESINTEREST RATESMONETARY FUNDFLEXIBLE EXCHANGE RATEGLOBALIZATIONEMERGING MARKETMONETARY TRANSMISSIONMARKETSDEBTINFLATION RATEOPEN ECONOMYBUSINESS CYCLEINTERNATIONAL ECONOMICSMACROECONOMIC INDICATORSGROSS DOMESTIC PRODUCTFINANCIAL SYSTEMMONETARY AUTHORITIESCOMMODITY PRICEFINANCEFOREIGN CURRENCYBANK POLICYMARKET ECONOMIESFLOATING EXCHANGE RATEINTEREST PARITYEMERGING MARKETSEQUITYINTEREST RATE CHANGESFEDERAL RESERVEFORWARD MARKETINTERNATIONAL FINANCIAL STATISTICSTRANSPARENCYFINANCIAL STABILITYPRIVATE SECTOR CREDITFINANCIAL CRISISCURRENCY CRISISWORLD ECONOMYOUTPUT GAPPRICE STABILITYEXPENDITURESECONOMYCAPITAL FLOWSPROPERTYPRICE FLUCTUATIONST-BILLREAL EXCHANGE RATEMARKETFOREIGN EXCHANGEPRICE MOVEMENTSFIXED EFFECTSINFLATION RATESBUSINESS CYCLESCURRENCIESCENTRAL BANK POLICYGOODSEXCHANGE RATE VOLATILITYEQUITY MARKETSINVESTMENTMACROECONOMIC VOLATILITYRISKBONDGROWTH PERFORMANCEINFLATION OBJECTIVESFOREIGN INTERESTFINANCIAL MARKETSCAPITAL INFLOWSMONEY MARKETCONSUMER PRICE INDEXLENDINGTRANSITION ECONOMIESEXCHANGE RATEINSTRUMENTROBUSTNESS CHECKSSTABLE INFLATIONLIABILITIESOPEN ECONOMIESMACROECONOMIC PERFORMANCEASSET PRICEECONOMIESINTEREST RATE DIFFERENTIALSINVESTMENT DECISIONWorking PaperWorld Bank10.1596/1813-9450-7712