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Hybrid Inflation Targeting Regimes

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  • Carlos García
  • Jorge Restrepo
  • Scott Roger

Abstract

This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank’s policy reaction function can improve macroeconomic performance. It finds that including an element of exchange rate smoothing in the policy reaction function is helpful for handling risk premium shocks by either financially robust advanced economies or financially vulnerable emerging economies. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exchange rate smoothing because of the perverse impact of exchange rate movements on economic activity.

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Bibliographic Info

Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 533.

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Date of creation: Dec 2009
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Handle: RePEc:chb:bcchwp:533

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Citations

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Cited by:
  1. Marc Pourroy, 2013. "Inflation-Targeting and Foreign Exchange Interventions in Emerging Economies," Documents de travail du Centre d'Economie de la Sorbonne 13074, Université Panthéon-Sorbonne (Paris 1), Centre d'Economie de la Sorbonne.
  2. Aron, Janine & Farrell, Greg & Muellbauer, John & Sinclair, Peter, 2010. "Exchange Rate Pass-through and Monetary Policy in South Africa," CEPR Discussion Papers 8153, C.E.P.R. Discussion Papers.
  3. Berganza, Juan Carlos & Broto, Carmen, 2011. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," BOFIT Discussion Papers 9/2011, Bank of Finland, Institute for Economies in Transition.
  4. Rossini, Renzo & Quispe, Zenón & Serrano, Enrique, 2013. "Foreign Exchange Interventions in Peru," Working Papers 2013-016, Banco Central de Reserva del Perú.
  5. S. Rajan, Ramkishen, 2010. "The Evolution and Impact of Asian Exchange Rate Regimes," ADB Economics Working Paper Series 208, Asian Development Bank.
  6. Shu Lin & Haichun Ye, 2012. "What to Target? Inflation or Exchange Rate," Southern Economic Journal, Southern Economic Association, vol. 78(4), pages 1202-1221, April.
  7. Pourroy, Marc, 2012. "Does exchange rate control improve inflation targeting in emerging economies?," Economics Letters, Elsevier, vol. 116(3), pages 448-450.
  8. Scott Roger, 2009. "Inflation Targeting At 20," IMF Working Papers 09/236, International Monetary Fund.
  9. Saborowski, Christian, 2009. "Inflation Targeting as a Means of Achieving Disinflation," The Warwick Economics Research Paper Series (TWERPS) 894, University of Warwick, Department of Economics.
  10. Jaromir Benes & Andrew Berg & Rafael A Portillo & David Vavra, 2013. "Modeling Sterilized Interventions and Balance Sheet Effects of Monetary Policy in a New-Keynesian Framework," IMF Working Papers 13/11, International Monetary Fund.
  11. Pierre-Richard Agénor & Luiz A. Pereira da Silva, 2013. "Inflation Targeting and Financial Stability: A Perspective from the Developing World," Working Papers Series 324, Central Bank of Brazil, Research Department.
  12. International Monetary Fund, 2011. "Improving the Monetary Policy Frameworks in Central America," IMF Working Papers 11/245, International Monetary Fund.
  13. Bleich, Dirk & Fendel, Ralf & Rülke, Jan-Christoph, 2012. "Inflation targeting makes the difference: Novel evidence on inflation stabilization," Journal of International Money and Finance, Elsevier, vol. 31(5), pages 1092-1105.

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