Meixing Dai (Beta-Theme, Universite Louis Pasteur) Moise Sidiropoulos (Aristotle University of Thessaloniki and LEAP and Beta-Theme, Universite Louis Pasteur)
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This paper studies the stability conditions in a simple dynamic economy model, in which central banks adopt an inflation-targeting regime to conduct their policy in a context of flexible exchange rates. We show that when inflation-targeting central banks place a low weight on their inflation target (a relatively high degree of inflation-targeting flexibility), the economy will have a saddle-point stationary equilibrium. In the opposite, when inflation-targeting central banks place a high weight on their inflation target (they have a relatively low degree of inflation-targeting flexibility), a stable equilibrium is impossible. Thus, inflation targeting will automatically give greater weight to exchange rate developments the more open is the economy. Responding too quickly to what may prove to be temporary exchange rate fluctuations, inflation-targeting central banks can set up dynamic instabilities.
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Article provided by Cyprus Economic Society and University of Cyprus in its journal Ekonomia.
Volume (Year): 8 (2005) Issue (Month): 2 (Winter) Pages: 125-141 Download reference. The following formats are available: HTML
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Find related papers by JEL classification: E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics
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