THE ROLE OF INFLATION TARGETING AND INTEREST RATE POLICY IN MANAGING CAPITAL FLOWS: EVIDENCE FROM UZBEKISTAN AND EMERGING ECONOMIES
DOI:
https://doi.org/10.5281/zenodo.21133460Keywords:
inflation targeting; interest rate policy; capital flows; monetary transmission mechanism; Uzbekistan; emerging economies; ARDL model; exchange rate channel; Mundell–Fleming model; panel data analysis.Abstract
The intensification of global capital flow volatility following the COVID-19 pandemic in 2020 and
subsequent geopolitical disruptions has increased the importance of monetary policy effectiveness in emerging
economies. Inflation targeting (IT) frameworks and interest rate transmission mechanisms serve as key tools for
central banks seeking to stabilize capital flows while maintaining price stability.
The policy interest rate has a statistically significant negative effect on net capital flows (β₁ = −0.843, p <
0.001), which is consistent with the interest rate parity hypothesis. FDI inflows and GDP growth are identified as
the strongest positive determinants of capital flow stability. The ARDL long-run coefficient for inflation is −0.689,
confirming that price instability weakens the sustainability of capital inflows. Uzbekistan’s partial inflation targeting
regime shows increasing effectiveness, with inflation declining from 17.5% in 2018 to 7.5% in 2024.
The findings provide practical recommendations for the Central Bank of Uzbekistan regarding the adoption
of forward guidance, refinement of the interest rate corridor, and improvement of communication strategy.
Recommendations are also addressed to the Ministry of Finance, commercial banks, and financial market
regulators.
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