Do Inflation Targeters in Southeast and East Asia Respond to Exchange Rate Movements?

Abstract

We use a small open economy dynamic stochastic general equilibrium model to explore whether inflation-targeting central banks in Indonesia, South Korea, and Thailand responded to exchange rates in recent years. In developing this model, we account for the fact that the central banks respond to inflation, output, and exchange rates as an augmented Taylor rule. By performing posterior odds tests, we find that the augmented Taylor rule fits the data much better than a basic Taylor rule in each country. The exchange rate is of higher priority than output, especially for the Bank of Thailand.