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Asymmetric Exchange Rate Dependence: An Empirical Investigation for Small Inflation-Targeting Economies

This paper examines asymmetry in exchange rate dependence between domestic and foreign currencies vis-a-vis some world currencies for small inflation targeters, and find mixed evidence. Positive-type asymmetry (i.e., greater dependence during joint appreciations than joint depreciations) is strong for Australia, New Zealand, Sweden and the UK, while negative-type asymmetry (i.e., greater dependence during joint depreciations than joint appreciations) for Canada. The asymmetry type can also be different for the same inflation-targeting country if a different world currency is used to measure the currency price. We interpret positive-type (negative-type) asymmetry as an indication of strict (flexible) inflation targeting.