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Inflation Targeting in Financially Stable Economies: Has it Been Flexible Enough?

In: Monetary Policy under Financial Turbulence

  • Mauricio Calani

    (University of Pennsylvania)

  • Kevin Cowan

    (Central Bank of Chile)

  • Pablo García S.

    (International Monetary Fund)

The financial crisis and recession of 2008-2009 required significant policy responses by central banks. For formal inflation targeters (IT), a natural question arises about whether IT frameworks were flexible enough to address this unprecedented policy environment. We address this question by assessing the policy responses to the crisis of nine IT central banks that did not face systemic problems in their financial systems. We document substantial deviations of actual policy responses from prescriptions of conventional monetary policy reaction functions, a fact which we more easily reconcile with a decline in the persistence of monetary policy. We also provide evidence on the overall impact of non-monetarypolicy measures on the exchange rate and money market.

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This chapter was published in: Luis Felipe Céspedes & Roberto Chang & Diego Saravia (ed.) Monetary Policy under Financial Turbulence, , chapter 01, pages 283-368, 2011.
This item is provided by Central Bank of Chile in its series Central Banking, Analysis, and Economic Policies Book Series with number v16c09pp283-368.
Handle: RePEc:chb:bcchsb:v16c09pp283-368
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  14. Jens H. E. Christensen & Jose A. Lopez & Glenn D. Rudebusch, 2009. "Do central bank liquidity facilities affect interbank lending rates?," Working Paper Series 2009-13, Federal Reserve Bank of San Francisco.
  15. International Monetary Fund, 2009. "How to Stop a Herd of Running Bears? Market Response to Policy Initiatives During the Global Financial Crisis," IMF Working Papers 09/204, International Monetary Fund.
  16. James McAndrews & Asani Sarkar & Zhenyu Wang, 2008. "The effect of the Term Auction Facility on the London Inter-Bank Offered Rate," Staff Reports 335, Federal Reserve Bank of New York.
  17. John P. Judd & Glenn D. Rudebusch, 1998. "Taylor's rule and the Fed, 1970-1997," Economic Review, Federal Reserve Bank of San Francisco, pages 3-16.
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