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Degree of openness and inflation targeting policy: model of a small open economy

  • Jihene Bousrih

Purpose – The purpose of this paper is to deal with the dynamics of a Neo-Keynesian model applied to a small open economy, in order to show the impact of commercial openness on the choice of the optimal inflation target. Design/methodology/approach – The author uses a neo-Keynesian model with calibration for Chile. Findings – The results show that there is a relation between the degree of openness and the type of inflation targeting policy. Originality/value – The originality of the paper is to use a neo-Keynesian model to deal with a small open economy, which uses inflation targeting as a monetary rule.

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Article provided by Emerald Group Publishing in its journal Journal of Financial Economic Policy.

Volume (Year): 4 (2012)
Issue (Month): 3 (August)
Pages: 232-246

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Handle: RePEc:eme:jfeppp:v:4:y:2012:i:3:p:232-246
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  1. Reinhart, Carmen & Calvo, Guillermo, 2001. "Fixing for your life," MPRA Paper 13873, University Library of Munich, Germany.
  2. Adolfson, Malin, 2001. "Monetary Policy with Incomplete Exchange Rate Pass-Through," Working Paper Series 127, Sveriges Riksbank (Central Bank of Sweden).
  3. David Romer, 1991. "Openness and inflation: theory and evidence," Proceedings, Federal Reserve Bank of San Francisco, issue Nov.
  4. Jose Sanchez-Fung, 2004. "Inflation targeting and monetary analysis in Chile and Mexico," Money Macro and Finance (MMF) Research Group Conference 2003 82, Money Macro and Finance Research Group.
  5. Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
  6. Richard Clarida & Jordi Gali & Mark Gertler, 2001. "Optimal Monetary Policy in Closed versus Open Economies: An Integrated Approach," NBER Working Papers 8604, National Bureau of Economic Research, Inc.
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  8. Alessandro Flamini, 2004. "Inflation Targeting and Exchange Rate Pass-Through," IHEID Working Papers 04-2004, Economics Section, The Graduate Institute of International Studies.
  9. Carare, Alina & Stone, Mark R., 2006. "Inflation targeting regimes," European Economic Review, Elsevier, vol. 50(5), pages 1297-1315, July.
  10. Blanchard, Olivier Jean & Kahn, Charles M, 1980. "The Solution of Linear Difference Models under Rational Expectations," Econometrica, Econometric Society, vol. 48(5), pages 1305-11, July.
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  12. Ben S. Bernanke & Frederic S. Mishkin, 1997. "Inflation Targeting: A New Framework for Monetary Policy?," Journal of Economic Perspectives, American Economic Association, vol. 11(2), pages 97-116, Spring.
  13. Amato, Jeffery D. & Gerlach, Stefan, 2002. "Inflation targeting in emerging market and transition economies: Lessons after a decade," European Economic Review, Elsevier, vol. 46(4-5), pages 781-790, May.
  14. Calvo, Guillermo A, 2001. "Capital Markets and the Exchange Rate with Special Reference to the Dollarization Debate in Latin America," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 33(2), pages 312-34, May.
  15. Corrinne Ho & Robert N. McCauley, 2003. "Living with flexible exchange rates: issues and recent experience in inflation targeting emerging market economies," BIS Working Papers 130, Bank for International Settlements.
  16. Marc Giannoni & Michael Woodford, 2004. "Optimal Inflation-Targeting Rules," NBER Chapters, in: The Inflation-Targeting Debate, pages 93-172 National Bureau of Economic Research, Inc.
  17. Edwin M. Truman, 2003. "Inflation Targeting in the World Economy," Peterson Institute Press: All Books, Peterson Institute for International Economics, number 346.
  18. Jordi Gali & Tommaso Monacelli, 1999. "Optimal Monetary Policy and Exchange Rate Volatility in a Small Open Economy," Boston College Working Papers in Economics 438, Boston College Department of Economics, revised 15 Nov 1999.
  19. Paul Conway & Aaron Drew & Ben Hunt & Alasdair Scott, 1998. "Exchange rate effects and inflation targeting in a small open economy: a stochastic analysis using FPS," Reserve Bank of New Zealand Discussion Paper Series G99/4, Reserve Bank of New Zealand.
  20. Eric Parrado, 2004. "Inflation Targeting and Exchange Rate Rules in an Open Economy," IMF Working Papers 04/21, International Monetary Fund.
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