Exchange rate asymmetry and flexible exchange rates under inflation targeting regimes: Evidence from four east and southeast asian countries

While many have underscored the role of a flexible exchange rate policy under an inflation targeting (IT) regime, very few studies have examined what actually happens to exchange rate policy once the emerging market announces that it will adopt inflation targeting. The central contention of this paper is that while the adoption of an inflation targeting (IT) policy may lead to more flexible exchange rate movements, for various reasons it is possible that the degree of flexibility will be significantly higher on one side of the market. In this study, we demonstrate that four Asian economies-namely, Indonesia, Korea, the Philippines and Thailand-whom were among the first group of emerging markets to embrace the inflation targeting framework of monetary policy, tend to adopt a form of asymmetrical exchange rate behavior, wherein appreciation pressures are restrained more substantially than depreciation pressures.