IDEAS home Printed from https://ideas.repec.org/a/ekn/ekonom/v8y2005i2p125-141.html
   My bibliography  Save this article

Should inflation-targeting central banks care about dynamic instabilities in an open economy?

Author

Listed:
  • Meixing Dai

    (Beta-Theme, Universite Louis Pasteur)

  • Moise Sidiropoulos

    (Aristotle University of Thessaloniki and LEAP and Beta-Theme, Universite Louis Pasteur)

Abstract

This paper studies the stability conditions in a simple dynamic economy model, in which central banks adopt an inflation-targeting regime to conduct their policy in a context of flexible exchange rates. We show that when inflation-targeting central banks place a low weight on their inflation target (a relatively high degree of inflation-targeting flexibility), the economy will have a saddle-point stationary equilibrium. In the opposite, when inflation-targeting central banks place a high weight on their inflation target (they have a relatively low degree of inflation-targeting flexibility), a stable equilibrium is impossible. Thus, inflation targeting will automatically give greater weight to exchange rate developments the more open is the economy. Responding too quickly to what may prove to be temporary exchange rate fluctuations, inflation-targeting central banks can set up dynamic instabilities.

Suggested Citation

  • Meixing Dai & Moise Sidiropoulos, 2005. "Should inflation-targeting central banks care about dynamic instabilities in an open economy?," Ekonomia, Cyprus Economic Society and University of Cyprus, vol. 8(2), pages 125-141, Winter.
  • Handle: RePEc:ekn:ekonom:v:8:y:2005:i:2:p:125-141
    as

    Download full text from publisher

    To our knowledge, this item is not available for download. To find whether it is available, there are three options:
    1. Check below whether another version of this item is available online.
    2. Check on the provider's web page whether it is in fact available.
    3. Perform a search for a similarly titled item that would be available.

    Citations

    Citations are extracted by the CitEc Project, subscribe to its RSS feed for this item.
    as


    Cited by:

    1. Dai, Meixing, 2007. "The design of a ‘two-pillar’ monetary policy strategy," MPRA Paper 14403, University Library of Munich, Germany, revised Mar 2009.
    2. Meixing DAI, 2009. "On the role of money growth targeting under inflation targeting regime," Working Papers of BETA 2009-11, Bureau d'Economie Théorique et Appliquée, UDS, Strasbourg.

    More about this item

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

    Statistics

    Access and download statistics

    Corrections

    All material on this site has been provided by the respective publishers and authors. You can help correct errors and omissions. When requesting a correction, please mention this item's handle: RePEc:ekn:ekonom:v:8:y:2005:i:2:p:125-141. See general information about how to correct material in RePEc.

    For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Managing Editor). General contact details of provider: http://edirc.repec.org/data/cyessea.html .

    If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

    We have no references for this item. You can help adding them by using this form .

    If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your RePEc Author Service profile, as there may be some citations waiting for confirmation.

    Please note that corrections may take a couple of weeks to filter through the various RePEc services.

    IDEAS is a RePEc service hosted by the Research Division of the Federal Reserve Bank of St. Louis . RePEc uses bibliographic data supplied by the respective publishers.