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Explicit and Implicit Targets in Open Economies

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  • Silvia Sgherri

Abstract

Under a flexible inflation targeting regime, should policymakers avoid any reaction to movements in the foreign exchange market? Using data for six advanced open economies explicitly targeting inflation, the paper examines empirically whether real exchange rate disequilibria systematically affect the conduct of monetary policy. Estimates indicate that monetary policy responses in inflation-targeting, open economies have changed significantly, as the institutional framework for the conduct of monetary policy has evolved. In particular, an explicit target for core inflation and a greater use of the expectation channel of monetary policy appear to be key features of the newest policy framework. In this context, central banks are unlikely to react to regular fluctuations in the exchange rate.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 05/176.

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Length: 27
Date of creation: 01 Sep 2005
Date of revision:
Handle: RePEc:imf:imfwpa:05/176

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Keywords: Inflation targeting; Exchange rates; inflation; monetary policy; central bank; inflation targeting regime; inflation target; monetary authority; foreign exchange; optimal monetary policy; monetary fund; inflation ? targeting; monetary policy rules; monetary authorities; real output; aggregate demand; money market; monetary responses; monetary ? policy; effective exchange rates; inflationary pressures; real interest rate; foreign currency; monetary policy decision; inflationary expectations; monetary ? policy rules; high inflation; monetary regimes; monetary regime; inflation forecasts; inflation dynamics; rational expectations; price inflation; monetary policy objectives; real exchange rates; inflation targeting framework; money market interest rate; monetary policies; monetary framework; real rates; price stability; expectations of inflation; monetary reaction functions; independent monetary policy; inflation rate; nominal rate of interest; monetary policy decisions; monetary reaction function;

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  2. Walsh, Carl E., 2004. "Implications of a Changing Economic Structure for the Strategy of Monetary Policy," Santa Cruz Center for International Economics, Working Paper Series qt84g1q1g6, Center for International Economics, UC Santa Cruz.
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  9. Jordi Galí & Tommaso Monacelli, 2004. "Monetary policy and exchange rate volatility in a small open economy," Economics Working Papers 835, Department of Economics and Business, Universitat Pompeu Fabra.
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  13. Richard Clarida & Jordi Gali & Mark Gertler, 1997. "Monetary Policy Rules in Practice: Some International Evidence," NBER Working Papers 6254, National Bureau of Economic Research, Inc.
  14. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
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Citations

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Cited by:
  1. Efrem Castelnuovo, 2004. "Regime Shifts and the Stability of Backward Looking Phillips Curves in Open Economies," Computing in Economics and Finance 2004 49, Society for Computational Economics.
  2. Rageh, Rania, 2010. "Interest rate rule for the conduct of monetary policy: analysis for Egypt (1997:2007)," MPRA Paper 26639, University Library of Munich, Germany.
  3. Tony Cavoli & Ramkishen S. Rajan, 2006. "Inflation Targeting Arrangements in Asia: Exploring the Role of the Exchange Rate," SCAPE Policy Research Working Paper Series 0603, National University of Singapore, Department of Economics, SCAPE.
  4. Seedwell Hove & Albert Touna Mama & Fulbert Tchana Tchana, 2012. "Terms of Trade Shocks and Inflation Targeting in Emerging Market Economies," Working Papers 273, Economic Research Southern Africa.

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