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Explicit and Implicit Targets in Open Economies

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Author Info
Silvia Sgherri

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

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Length: 27 pages
Date of creation: 20 Sep 2005
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Handle: RePEc:imf:imfwpa:05/176

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Keywords: Inflation targeting Interest rate policy Exchange rates Monetary policy

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  1. 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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  2. Obstfeld, Maurice & Rogoff, Kenneth, 1995. "The Mirage of Fixed Exchange Rates," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 73-96, Fall. [Downloadable!] (restricted)
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  3. Malcolm D. Knight & Chair, 2003. "Implications of a changing economic structure for the strategy of monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 361-371. [Downloadable!]
  4. Jordi Gali & Tommaso Monacelli, 2002. "Monetary Policy and Exchange Rate Volatility in a Small Open Economy," NBER Working Papers 8905, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Corsetti, Giancarlo & Pesenti, Paolo, 2002. "International Dimensions of Optimal Monetary Policy," CEPR Discussion Papers 3349, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
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  6. Carl E. Walsh, 2003. "Implications of a changing economic structure for the strategy of monetary policy," Proceedings, Federal Reserve Bank of Kansas City, pages 297-348. [Downloadable!]
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  7. 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. [Downloadable!] (restricted)
  8. Brian Sack & Volker Wieland, 1999. "Interest-rate smoothing and optimal monetary policy: a review of recent empirical evidence," Finance and Economics Discussion Series 1999-39, Board of Governors of the Federal Reserve System (U.S.). [Downloadable!]
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  9. Svensson, Lars E. O., 1997. "Inflation forecast targeting: Implementing and monitoring inflation targets," European Economic Review, Elsevier, vol. 41(6), pages 1111-1146, June. [Downloadable!] (restricted)
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  10. Bordo, Michael D & Jeanne, Olivier, 2002. "Monetary Policy and Asset Prices: Does 'Benign Neglect' Make Sense?," International Finance, Blackwell Publishing, vol. 5(2), pages 139-64, Summer. [Downloadable!] (restricted)
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  11. Gali, Jordi & Gertler, Mark & Lopez-Salido, J. David, 2001. "European inflation dynamics," European Economic Review, Elsevier, vol. 45(7), pages 1237-1270. [Downloadable!] (restricted)
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  12. Roberto Rigobon & Brian Sack, 2003. "Measuring The Reaction Of Monetary Policy To The Stock Market," The Quarterly Journal of Economics, MIT Press, vol. 118(2), pages 639-669, May. [Downloadable!] (restricted)
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  13. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1998. "Monetary policy rules in practice Some international evidence," European Economic Review, Elsevier, vol. 42(6), pages 1033-1067, June. [Downloadable!] (restricted)
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  14. Goodhart, Charles, 2001. "What Weight Should Be Given to Asset Prices in the Measurement of Inflation?," Economic Journal, Royal Economic Society, vol. 111(472), pages F335-56, June. [Downloadable!] (restricted)
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  1. José J. Sidaoui & Manuel Ramos-Francia, 2008. "The monetary transmission mechanism in Mexico: recent developments," BIS Papers chapters, in: Bank for International Settlements (ed.), Transmission mechanisms for monetary policy in emerging market economies, volume 35, pages 363-394 Bank for International Settlements. [Downloadable!]
  2. 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. [Downloadable!]
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