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Inflation Targeting in a Small Open Economy

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  • Nicolas A. Cuche-Curti
  • Harris Dellas
  • Jean-Marc Natal

Abstract

In this paper we offer a justification for the observed wide variation in monetary practices across industrial countries. We claim that differences in the monetary policy rule adopted may simply reflect differences in economic structure and, in particular, in the types of shocks encountered and nominal rigidities present in various countries. We find that a case for inflation targeting can be made when external shocks are the prevalent source of volatility in the economy - a likely scenario for a small open economy. A policy of strict inflation targeting performs best when the main source of nominal rigidity is to be found in the labour market, while a policy of flexible inflation targeting that also puts some emphasis on exchange rate volatility has superior performance when the main source of nominal rigidity is in the goods market. Domestic supply shocks, on the other hand, call for greater tolerance of short-run inflation movements, especially in the presence of nominal wage rigidities. Copyright 2008 The Authors. Journal compilation 2008 Blackwell Publishing Ltd

Suggested Citation

  • Nicolas A. Cuche-Curti & Harris Dellas & Jean-Marc Natal, 2008. "Inflation Targeting in a Small Open Economy," International Finance, Wiley Blackwell, vol. 11(1), pages 1-18, May.
  • Handle: RePEc:bla:intfin:v:11:y:2008:i:1:p:1-18
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    Cited by:

    1. Novák, Zsuzsanna, 2014. "Monetáris politika, infláció és gazdasági növekedés Kelet-Közép- és Délkelet-Európában
      [Monetary policy, inflation and economic growth in Central and South Eastern Europe]
      ," Közgazdasági Szemle (Economic Review - monthly of the Hungarian Academy of Sciences), Közgazdasági Szemle Alapítvány (Economic Review Foundation), vol. 0(7), pages 923-942.
    2. František Brázdik, 2011. "An Announced Regime Switch: Optimal Policy for the Transition Period," Czech Journal of Economics and Finance (Finance a uver), Charles University Prague, Faculty of Social Sciences, vol. 61(5), pages 411-431, November.
    3. Hove, Seedwell & Touna Mama, Albert & Tchana Tchana, Fulbert, 2015. "Monetary policy and commodity terms of trade shocks in emerging market economies," Economic Modelling, Elsevier, vol. 49(C), pages 53-71.
    4. Nicolas Alexis Cuche-Curti & Harris Dellas & Jean-Marc Natal, 2009. "A dynamic stochastic general equilibrium model for Switzerland," Economic Studies 2009-05, Swiss National Bank.

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