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The Choice of Monetary Policy Regime for Small Open Economies

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  • Kai Leitemo
  • Oistein Roisland

Abstract

Inflation targeting and exchange rate targeting, including monetary union, are analyzed in a simple, estimated macroeconomic model of a small open economy. Flexible inflation targeting produces lower nominal and real variability than exchange rate targeting because the latter gives rise to persistent oscillations in the real interest rate and the real exchange rate due to the 'Walters' effect'. We find, however, that with commitment to simple instrument rules, the performance of flexible inflation targeting can almost be matched.

Suggested Citation

  • Kai Leitemo & Oistein Roisland, 2002. "The Choice of Monetary Policy Regime for Small Open Economies," Annals of Economics and Statistics, GENES, issue 67-68, pages 463-494.
    • Handle: RePEc:adr:anecst:y:2002:i:67-68:p:463-494
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    File URL: http://www.jstor.org/stable/20076356
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    References listed on IDEAS

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    2. Flamini, Alessandro & Milas, Costas, 2015. "Distribution forecast targeting in an open-economy, macroeconomic volatility and financial implications," Journal of Financial Stability, Elsevier, vol. 16(C), pages 89-105.
    3. Alessandro Flamini & Costas Milas, 2014. "Open-economy Distribution Forecast Targeting, Macroeconomic Volatility and Financial Implication," DEM Working Papers Series 080, University of Pavia, Department of Economics and Management.
    4. Roman Horvath, 2020. "Peer Effects in Central Banking," IMF Economic Review, Palgrave Macmillan;International Monetary Fund, vol. 68(4), pages 764-814, December.
    5. Dai, Meixing, 2006. "Independent inflation-targeting regime versus monetary union: An analysis of dynamic stability under endogenous inflation expectations," MPRA Paper 15142, University Library of Munich, Germany.

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