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Rules versus discretion on the choice between exchange-rate-targeting and monetary-aggregate-targeting

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  • Yu-Lin Wang
  • Hsiu-Yun Lee
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    Abstract

    This paper compares the performance of inflation and welfare loss between exchange-rate-targeting and monetary-aggregate-targeting regimes for a small-open economy characterized by a rational expectations model of the Phillips curve. We also consider rules-versus-discretion in policy. We obtain three interesting results. First, both regimes result in the same target rate of inflation and the smallest long-run welfare loss, if an active contingent rule is credibly followed. Second, when discretion is undertaken, an exchange-rate-targeting policy is always superior to a monetary-aggregate-targeting one. Third, for a simple fixed rule, Friedman-type's monetary-aggregate-targeting policy works better than exchange-rate-targeting only under specific circumstances.

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    File URL: http://www.tandfonline.com/doi/abs/10.1080/17487870902739210
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    Bibliographic Info

    Article provided by Taylor & Francis Journals in its journal Journal of Economic Policy Reform.

    Volume (Year): 12 (2009)
    Issue (Month): 1 ()
    Pages: 43-55

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    Handle: RePEc:taf:jpolrf:v:12:y:2009:i:1:p:43-55

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    Related research

    Keywords: exchange-rate-targeting; monetary-aggregate-targeting; exchange rate regimes; monetary policy;

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