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Hybrid Inflation Targeting Regimes

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  • Carlos Garcia
  • 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 is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. 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 exhange rate smoothing because of the perverse impact of exchange rate movements on activity.

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Bibliographic Info

Paper provided by International Monetary Fund in its series IMF Working Papers with number 09/234.

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Length: 57
Date of creation: 01 Oct 2009
Date of revision:
Handle: RePEc:imf:imfwpa:09/234

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Keywords: Inflation targeting; Central bank policy; Developing countries; Economic models; Exchange rates; External shocks; Risk premium; exchange rate; inflation; monetary policy; real exchange rate; exchange rate movements; inflation target; foreign exchange; exchange rate volatility; exchange rate band; real interest rate; exchange rate movement; price level; rise in inflation; real interest rates; inflation objective; monetary economics; exchange rate pass; exchange rate changes; macroeconomic performance; currency depreciation; inflation rate; actual inflation; foreign currency; exchange rate uncertainty; exchange rate determination; real exchange rates; inflation performance; foreign exchange market; exchange rate channel; nominal exchange rate; home currency; aggregate demand; nominal interest rate; exchange rate developments; price elasticity; real output; exchange rate change; increase in interest rates; currency appreciation; foreign exchange reserves; relative prices; inflation forecasts; coefficient on inflation; effective exchange rate; inflationary consequences; exchange rate target; terms of trade shocks; real rate of interest; exchange rate regime; real exchange rate movements; low inflation; exchange rate peg; equilibrium exchange rate; explicit exchange rate; inflation equation; exchange rate adjustment; exchange rate rules; macroeconomic stability; exchange rate rule; exchange rate flexibility; real wages; financial stability; inflation targeting regime; exchange rate policy; currency risk; flexible ? exchange rate; exchange rate into account; exchange rate misalignment; terms of trade; exchange reserves; exchange rate shocks; relative price;

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Citations

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Cited by:
  1. Saborowski, Christian, 2010. "Inflation targeting as a means of achieving disinflation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(12), pages 2510-2532, December.
  2. 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.
  3. Juan Carlos Berganza & Carmen Broto, 2011. "Flexible inflation targets, forex interventions and exchange rate volatility in emerging countries," Banco de Espa�a Working Papers 1105, Banco de Espa�a.
  4. 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.
  5. Scott Roger, 2009. "Inflation Targeting At 20," IMF Working Papers 09/236, International Monetary Fund.
  6. Rossini, Renzo & Quispe, Zenón & Serrano, Enrique, 2013. "Foreign Exchange Interventions in Peru," Working Papers 2013-016, Banco Central de Reserva del Perú.
  7. International Monetary Fund, 2011. "Improving the Monetary Policy Frameworks in Central America," IMF Working Papers 11/245, International Monetary Fund.
  8. S. Rajan, Ramkishen, 2010. "The Evolution and Impact of Asian Exchange Rate Regimes," ADB Economics Working Paper Series 208, Asian Development Bank.
  9. 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.
  10. Pourroy, Marc, 2012. "Does exchange rate control improve inflation targeting in emerging economies?," Economics Letters, Elsevier, vol. 116(3), pages 448-450.
  11. 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.
  12. 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.
  13. 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.

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