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Monetary Policy under Flexible Exchange Rates: An Introduction to Inflation Targeting

In: Inflation Targeting: Desing, Performance, Challenges

  • Pierre-Richard Agénor

    (University of Manchester)

This paper provides an introduction to inflation targeting, with a particular emphasis on analytical issues and the recent experience of developing countries. After presenting a formal framework, it discusses basic requirements for inflation targeting and how such a regime differs from money and exchange rate targeting regimes. The operational framework of inflation targeting (including the price index to monitor, the target horizon, forecasting procedures, and the role of asset prices) is then discussed. Next, recent experiences with inflation targets are examined. The last part of the paper focuses on some current research issues in the literature, including the role of nonlinearities regarding both policy preferences and the slope of the output-inflation tradeoff.), uncertainty (about behavioral parameters and transmission lags), and the treatment of credibility in empirical models of inflation. New evidence on the convexity of the Phillips curve is also provided for six developing countries.

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This chapter was published in: Norman Loayza & Raimundo Soto & Norman Loayza (Series Editor) & Klaus Schmidt-Hebbel (Series Editor) (ed.) Inflation Targeting: Desing, Performance, Challenges, , chapter 3, pages 079-170, 2002.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v05c03pp079-170.
Handle: RePEc:chb:bcchsb:v05c03pp079-170
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  1. Faust, Jon & Svensson, Lars E O, 1998. "Transparency and Credibility: Monetary Policy with Unobservable Goals," CEPR Discussion Papers 1852, C.E.P.R. Discussion Papers.
  2. Schellekens, P. & Chadha, J.S., 1999. "Monetary Policy Loss Functions: Two Cheers for the Quadratic," Cambridge Working Papers in Economics 9920, Faculty of Economics, University of Cambridge.
  3. Stephen G. Cecchetti & Michael Ehrmann, 1999. "Does Inflation Targeting Increase Output Volatility? An International Comparison of Policymakers' Preferences and Outcomes," NBER Working Papers 7426, National Bureau of Economic Research, Inc.
  4. Bernanke, Ben S & Woodford, Michael, 1997. "Inflation Forecasts and Monetary Policy," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 29(4), pages 653-84, November.
  5. Arturo Estrella & Frederic S. Mishkin, 1996. "Is There a Role for Monetary Aggregates in the Conduct of Monetary Policy?," NBER Working Papers 5845, National Bureau of Economic Research, Inc.
  6. Christian H. Beddies, 1999. "Monetary Policy and Public Finances: Inflation Targets in a New Perspective," IMF Staff Papers, Palgrave Macmillan, vol. 46(3), pages 4.
  7. Laurence Boone & Claude Giorno & Pete Richardson, 1998. "Stock Market Fluctuations and Consumption Behaviour: Some Recent Evidence," OECD Economics Department Working Papers 208, OECD Publishing.
  8. Andrew G. Haldane & Nicoletta Batini, 1998. "Forward-Looking Rules for Monetary Policy," NBER Working Papers 6543, National Bureau of Economic Research, Inc.
  9. Jose De Gregorio & Peter Wickham & Patricio Arrau & Carmen Reinhart, 1991. "The Demand for Money in Developing Countries: Assessing the Role of Financial innovation," IMF Working Papers 91/45, International Monetary Fund.
  10. Stephen G. Cecchetti & Erica L. Groshen, 2000. "Understanding Inflation: Implications for Monetary Policy," NBER Working Papers 7482, National Bureau of Economic Research, Inc.
  11. Drazen, Allan & Masson, Paul R, 1994. "Credibility of Policies versus Credibility of Policymakers," The Quarterly Journal of Economics, MIT Press, vol. 109(3), pages 735-54, August.
  12. Robert Dittmar & William T. Gavin & Finn Kydland, 1999. "The inflation-output variability tradeoff and price-level targets," Review, Federal Reserve Bank of St. Louis, issue Jan, pages 23-32.
  13. Beetsma, Roel M W J & Jensen, Henrik, 1998. "Inflation Targets and Contracts with Uncertain Central Banker Preferences," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 30(3), pages 384-403, August.
  14. Agenor, Pierre-Richard & Masson, Paul R, 1999. "Credibility, Reputation, and the Mexican Peso Crisis," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 31(1), pages 70-84, February.
  15. C. John McDermott & Eswar Prasad & Pierre-Richard Agénor, 1999. "Macroeconomic Fluctuations in Developing Countries: Some Stylized Facts," IMF Working Papers 99/35, International Monetary Fund.
  16. Alex Cukierman, 1992. "Central Bank Strategy, Credibility, and Independence: Theory and Evidence," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262031981, June.
  17. Cukierman, Alex & Meltzer, Allan H, 1986. "A Theory of Ambiguity, Credibility, and Inflation under Discretion and Asymmetric Information," Econometrica, Econometric Society, vol. 54(5), pages 1099-1128, September.
  18. Haan, Jakob de & Kooi, Willem J., 2000. "Does central bank independence really matter?: New evidence for developing countries using a new indicator," Journal of Banking & Finance, Elsevier, vol. 24(4), pages 643-664, April.
  19. Bankim Chadha & Paul R. Masson & Guy Meredith, 1992. "Models of Inflation and the Costs of Disinflation," IMF Staff Papers, Palgrave Macmillan, vol. 39(2), pages 395-431, June.
  20. Joshua Aizenman & Pierre-Richard Agénor, 1997. "Contagion and Volatility with Imperfect Credit Markets," IMF Working Papers 97/127, International Monetary Fund.
  21. Clarida, Richard & Gali, Jordi & Gertler, Mark, 1997. "Monetary Policy Rules in Practice: Some International Evidence," Working Papers 97-32, C.V. Starr Center for Applied Economics, New York University.
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