Abstract:

The basic aim of this study is to investigate the relationship between inflation targeting and exchange rate policy for some countries adopting inflation targeting and to draw some lessons from these experiences. Experiences of floating exchange rate and inflation targeting regime have shown positive results. Credibility of inflation targeting regime has decreased inflation and pass-through from exchange to inflation. Inflation targeting and floating exchange rate policy have contributed a great deal to the internalisation of foreign exchange risk by the private sector. Private sector has learned to cope with foreign exchange uncertainty. While financial markets develop, foreign exchange interventions appear to be less and less effective. Strong financial markets, important progress in derivatives market deepening and a lower pass-through from exchange rate to inflation have contributed to increasing the effectiveness of monetary policies and decreased motives for foreign exchange intervention over time. Interventions of central banks in foreign exchange markets are more likely to focus on dampening exchange rate volatility

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