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CPI Inflation Targeting and Exchange Rate Pass-through

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Author Info

  • Alessandro Flamini

    (GIIS)

Abstract

This paper analyzes how imperfect exchange rate pass-through affects the transmission of the CPI inflation targeting optimal monetary policy. In the short run, delayed pass-through constraints monetary policy more than incomplete pass-through and interest rate smoothing amplifies this effect. In addition, imperfect pass-through does not increase the variability of the real exchange rate for a subset of strict CPI inflation targeting cases and for flexible CPI inflation targeting. Furthermore, there exists an inverse relation between the pass-through and the insulation of CPI inflation from foreign shocks, and when the pass-through falls, the impact on the trade-off between the stabilization of both CPI inflation and output depends on how strictly the central bank is targeting CPI inflation and on the kind of imperfect pass-through.

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File URL: http://128.118.178.162/eps/mac/papers/0306/0306017.pdf
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Bibliographic Info

Paper provided by EconWPA in its series Macroeconomics with number 0306017.

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Length: 37 pages
Date of creation: 26 Jun 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0306017

Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 37 ; figures: included
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Web page: http://128.118.178.162

Related research

Keywords: Inflation Targeting; Exchange Rate Pass-through; Open-economy; Direct Exchange Rate Channel; Optimal Monetary Policy.;

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References

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Citations

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Cited by:
  1. Mette Ersbak Bang Nielsen, . "Exchange Rate Targeting in a Small Open Economy," Borradores de Economia 367, Banco de la Republica de Colombia.
  2. Piotr Banbula & Witold Kozinski & Michal Rubaszek, 2011. "The role of the exchange rate in monetary policy in Poland," BIS Papers chapters, in: Bank for International Settlements (ed.), Capital flows, commodity price movements and foreign exchange intervention, volume 57, pages 285-295 Bank for International Settlements.
  3. William D. Craighead, 2012. "Monetary Rules and Sectoral Unemployment in Open Economies," Wesleyan Economics Working Papers 2012-001, Wesleyan University, Department of Economics.

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