Inflation targeting or fear of floating in disguise: The case of Mexico

This paper uses simple analytics to show the similarities and differences between inflation targeting and fear of floating in emerging markets. The analytics provide well-defined predictions for the behaviour of exchange rates and relevant monetary variables under both regimes. This allows us to distinguish clearly one regime from another and empirically test whether or not a country that targets inflation also exhibits a fear of floating. We analyse the recent experience in Mexico where the authorities now claim to be following an inflation targeting regime. Mexico is also one of the countries claimed to exhibit a fear of floating. Using data from Banco de Mexico, we first confirm that by standard measures Mexico exhibits fear of floating. Second, we show that Mexico is inflation targeting and discuss the relationship and test for a distinction between the two. Finally, we conclude by discussing our results and their implications for other emerging market inflation targeters. Copyright (C) 2004 John Wiley Sons, Ltd.