Proceedings of 9th International Business and Social Science Research Conference
6 - 8 January, 2014, Novotel World Trade Centre, Dubai, UAE, ISBN: 978-1-922069-41-2
Fear of Appreciation and Inflation Targeting: The Emerging
Economies Dilemma
Hanen Gharbi
The paper examines the case for using the interest rate and the
foreign exchange interventions to conciliate the strategies of
inflation targeting and exchange rate management. We develop a
theoretical model where three strategies of exchange rate
management are compared (using interest rate, sterilized
intervention or partially sterilized interventions). The results
suggest that it is difficult to separate the inflation target from the
exchange rate target unless the central bank sterilizes totally its
interventions, which can be very difficult to realize in presence of
high capital inflows. The Chinese experience proves that capital
controls are the solution to this dilemma.
Key words: Inflation targeting, exchange rate management, foreign exchange market
interventions, sterilization.
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Dr. Hanen Gharbi, Department of economics, University Paris Dauphine, France,
Email: gharbi_hanen@yahoo.com
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