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Inflation Targeting, Exchange Rate Volatility and International Policy Coordination

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  • Alexandre, Fernando
  • Driffill, John
  • Spagnolo, Fabio

Abstract

In a linear rational expectations two-country model, using an aggregate demand, aggregate supply framework, we analyse the effects of the adoption of an inflation-targeting regime on exchange rate volatility and the possible scope for policy coordination. This analysis is conducted using optimized interest rate policy rules within a calibrated model. Rules for interest rates that respond either to exchange rates or to portfolio shocks give improved performance and permit gains from international coordination. Optimized Taylor rules perform relatively well. Copyright 2002 by Blackwell Publishers Ltd and The Victoria University of Manchester

Suggested Citation

  • Alexandre, Fernando & Driffill, John & Spagnolo, Fabio, 2002. "Inflation Targeting, Exchange Rate Volatility and International Policy Coordination," Manchester School, University of Manchester, vol. 70(4), pages 546-569, Special I.
  • Handle: RePEc:bla:manchs:v:70:y:2002:i:4:p:546-69
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    References listed on IDEAS

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    Cited by:

    1. Burcu Aydin & Engin Volkan, 2011. "Incorporating Financial Stability in Inflation Targeting Frameworks," IMF Working Papers 11/224, International Monetary Fund.
    2. Rodrigo Caputo, 2004. "Exchange Rates, Inflation and Monetary Policy Objectives in Open Economies: The Experience of Chile," Econometric Society 2004 Latin American Meetings 298, Econometric Society.
    3. Fernando Alexandre, 2002. "Monetary Policy, Investment and Non-Fundamental Shocks," NIPE Working Papers 6/2002, NIPE - Universidade do Minho.
    4. Chadha, Jagjit S. & Nolan, Charles, 2007. "Optimal simple rules for the conduct of monetary and fiscal policy," Journal of Macroeconomics, Elsevier, vol. 29(4), pages 665-689, December.
    5. Rodrigo Caputo, 2009. "External Shocks and Monetary Policy. Does it Pay to Respond to Exchange Rate Desviations?," Revista de Analisis Economico – Economic Analysis Review, Ilades-Georgetown University, Universidad Alberto Hurtado/School of Economics and Bussines, vol. 24(1), pages 55-99, Junio.
    6. F Alexandre & P Bacao, 2006. "Investment and Non-fundamental Movements in Asset Prices: is there a role for monetary policy?," Economic Issues Journal Articles, Economic Issues, vol. 11(1), pages 65-95, March.
    7. International Monetary Fund, 2011. "Republic of Korea; Selected Issues," IMF Staff Country Reports 11/247, International Monetary Fund.

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