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Degree of Openness and Inflation Targeting Policy: Model of a Small Open Economy

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  • Bousrih Jihene

    ()
    (UNIVERSITY OF RENNES 1)

  • Bousrih Jihene

Abstract

In this paper, we present the dynamics of a Neo-Keynesian model applied to a small open economy in order to study the impact of openness on the choice of the appropriate inflation targeting policy. In the event of exogenous shocks, we can use either a CPI inflation targeting policy or a domestic inflation targeting policy. We conclude that there is a relation between the degree of openness of the economy and the type of infation targeting policy. By considering a domestic shock, when the economy is more open towards outside, we may find that the adoption of CPI inflation targeting is benefical. Whereas in the event of foreign shock, the optimal rule would be the domestic inflation targeting. By considering the criteria of social welfare, we find that for an important degree of openness, the policy of CPI inflation targeting remains the optimal monetary rule.

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Paper provided by International Network for Economic Research - INFER in its series Working Papers with number 2010.2.

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Length: 29 pages
Date of creation: 2010
Date of revision:
Handle: RePEc:inf:wpaper:2010.2

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Keywords: Monetary policy; Domestic Inflation; CPI Inflation; Pass-Through; Degree of Openness;

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