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Rules versus discretion on the choice between exchange-rate-targeting and monetary-aggregate-targeting

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  • Yu-Lin Wang
  • Hsiu-Yun Lee

Abstract

This paper compares the performance of inflation and welfare loss between exchange-rate-targeting and monetary-aggregate-targeting regimes for a small-open economy characterized by a rational expectations model of the Phillips curve. We also consider rules-versus-discretion in policy. We obtain three interesting results. First, both regimes result in the same target rate of inflation and the smallest long-run welfare loss, if an active contingent rule is credibly followed. Second, when discretion is undertaken, an exchange-rate-targeting policy is always superior to a monetary-aggregate-targeting one. Third, for a simple fixed rule, Friedman-type's monetary-aggregate-targeting policy works better than exchange-rate-targeting only under specific circumstances.

Suggested Citation

  • Yu-Lin Wang & Hsiu-Yun Lee, 2009. "Rules versus discretion on the choice between exchange-rate-targeting and monetary-aggregate-targeting," Journal of Economic Policy Reform, Taylor & Francis Journals, vol. 12(1), pages 43-55.
  • Handle: RePEc:taf:jpolrf:v:12:y:2009:i:1:p:43-55
    DOI: 10.1080/17487870902739210
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