The Role of Inflation Targeting in Exchange Rate Unification Policy: Difference-in-Differences Approach

Generally, one of the important issue in open macroeconomics and international finance literature is the innovations of exchange rate regimes, and exchange rate unification policy is one of the most important reforming policies in developing and emerging countries. By considering the experience of other emerging countries for exchange rates unification policy in this study, it will be investigated that what is the role of inflation targeting for the implementation of the exchange rate unification policy? Moreover, it will be examined that can inflation targeting reduces the inflationary effects of this policy? For this purpose, the difference-in-differences approach is employed to estimate the effects of this policy using panel data during the period 1984-2016. According to the results, in countries which applied exchange rate unification policy, the lower inflation has been experienced in inflation targeting countries. However, the role of macroeconomic conditions and the economic environment have been important.