What to Target? Inflation or Exchange Rate

This study empirically compares, for the first time, the popular exchange‐rate–targeting regime with the recently emerged inflation‐targeting framework in developing countries. Applying a variety of propensity score matching methods and dynamic panel generalized method of moments (GMM) regressions to a sample of 50 developing countries for the years 1990–2006, we find strong and robust evidence that, compared to exchange‐rate targeting, inflation targeting leads to a significantly lower inflation rate, and the lower inflation rate does not come at a cost of slower growth.