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Inflation Targeting and the Exchange Rate in an Open Economy

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  • Włodzimierz Siwiński
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    Abstract

    Since 1998 Poland has applied the inflation targeting system of monetary policy. This paper reviews briefly the basic features of such type of monetary policy. The main purpose is to discuss the influence of such policy on the changes of foreign exchange rates. Our baseline framework is a standard general equilibrium model with money and temporary nominal price rigidities extended to the open economy context. We applied also the graphical interpretation of this model. We focus on the influence of monetary policy during transition to low inflation on the developments of foreign exchange rates and their potential consequences. Especially we discuss these consequences for less developed countries providing brief comments on the influence of anti-inflationary policy on the rate of exchange of Polish currency. Then we analyze the influence of specific shocks and the best responses of monetary policy. We ends with focusing on main conclusions stemming from our analysis.

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    Article provided by Faculty of Economic Sciences, University of Warsaw in its journal Ekonomia journal.

    Volume (Year): 5 (2002)
    Issue (Month): ()
    Pages:

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    Handle: RePEc:eko:ekoeko:5_3

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    1. Svensson, Lars E O, 2000. "The First Year Of The Eurosystem: Inflation Targeting Or Not?," CEPR Discussion Papers 2380, C.E.P.R. Discussion Papers.
    2. Richard Clarida & Jordi Gali & Mark Gertler, 1999. "The Science of Monetary Policy: A New Keynesian Perspective," NBER Working Papers 7147, National Bureau of Economic Research, Inc.
    3. Svensson, Lars E.O., 1997. "Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets," Seminar Papers 615, Stockholm University, Institute for International Economic Studies.
    4. Svensson, L.E.O., 1998. "Open-Economy Inflation Targeting," Papers 638, Stockholm - International Economic Studies.
    5. Frederic S. Mishkin & Klaus Schmidt-Hebbel, 2001. "One decade of inflation targeting in the world : What do we know and what do we need to know?," Working Papers Central Bank of Chile 101, Central Bank of Chile.
    6. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging-Market Countries," American Economic Review, American Economic Association, vol. 90(2), pages 105-109, May.
    7. John B. Taylor, 2001. "The Role of the Exchange Rate in Monetary-Policy Rules," American Economic Review, American Economic Association, vol. 91(2), pages 263-267, May.
    8. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
    9. Bennett T. McCallum, 2001. "Should Monetary Policy Respond Strongly to Output Gaps?," American Economic Review, American Economic Association, vol. 91(2), pages 258-262, May.
    10. Michael Woodford, 2001. "The Taylor Rule and Optimal Monetary Policy," American Economic Review, American Economic Association, vol. 91(2), pages 232-237, May.
    11. Taylor, John B., 1993. "Discretion versus policy rules in practice," Carnegie-Rochester Conference Series on Public Policy, Elsevier, vol. 39(1), pages 195-214, December.
    12. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Open versus Closed Economies: An Integrated Approach," American Economic Review, American Economic Association, vol. 91(2), pages 248-252, May.
    13. Michael Woodford, 2000. "Pitfalls of Forward-Looking Monetary Policy," American Economic Review, American Economic Association, vol. 90(2), pages 100-104, May.
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