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Hybrid Inflation Targeting Regimes

  • Carlos García
  • Jorge Restrepo
  • Scott Roger

This paper uses a DSGE model to examine whether including the exchange rate explicitly in the central bank’s policy reaction function can improve macroeconomic performance. It finds that including an element of exchange rate smoothing in the policy reaction function is helpful for handling risk premium shocks by either financially robust advanced economies or financially vulnerable emerging economies. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exchange rate smoothing because of the perverse impact of exchange rate movements on economic activity.

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File URL: http://www.bcentral.cl/estudios/documentos-trabajo/pdf/dtbc533.pdf
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Paper provided by Central Bank of Chile in its series Working Papers Central Bank of Chile with number 533.

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Date of creation: Dec 2009
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Handle: RePEc:chb:bcchwp:533
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  1. Aaron Drew & Benjamin Hunt, 1999. "Efficient simple policy rules and the implications of potential output uncertainty," Reserve Bank of New Zealand Discussion Paper Series G99/5, Reserve Bank of New Zealand.
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  5. Aizenman, Joshua & Hutchison, Michael M. & Noy, Ilan, 2008. "Inflation Targeting and Real Exchange Rates in Emerging Markets," Santa Cruz Department of Economics, Working Paper Series qt6d23q90v, Department of Economics, UC Santa Cruz.
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  8. Leitemo, Kai & Soderstrom, Ulf, 2005. "Simple monetary policy rules and exchange rate uncertainty," Journal of International Money and Finance, Elsevier, vol. 24(3), pages 481-507, April.
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  13. Frömmel, Michael & Schobert, Franziska, 2006. "Monetary Policy Rules in Central and Eastern Europe," Hannover Economic Papers (HEP) dp-341, Leibniz Universität Hannover, Wirtschaftswissenschaftliche Fakultät.
  14. Christopher Ragan, 2005. "The Exchange Rate and Canadian Inflation Targeting," Working Papers 05-34, Bank of Canada.
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  18. Frederic S. Mishkin, 2000. "Inflation Targeting in Emerging Market Countries," NBER Working Papers 7618, National Bureau of Economic Research, Inc.
  19. Wei Dong, 2007. "Expenditure-Switching Effect and the Choice of Exchange Rate Regime," Working Papers 07-54, Bank of Canada.
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  26. Camilo E Tovar, 2006. "Devaluations, output and the balance sheet effect: a structural econometric analysis," BIS Working Papers 215, Bank for International Settlements.
  27. Wei Dong, 2013. "Do central banks respond to exchange rate movements? Some new evidence from structural estimation," Canadian Journal of Economics, Canadian Economics Association, vol. 46(2), pages 555-586, May.
  28. Tille, Cedric, 2001. "The role of consumption substitutability in the international transmission of monetary shocks," Journal of International Economics, Elsevier, vol. 53(2), pages 421-444, April.
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  30. Tony Cavoli & Ramkishen S. Rajan, 2006. "Monetary Policy Rules For Small And Open Developing Economies: A Counterfactual Policy Analysis," Journal of Economic Development, Chung-Ang Unviersity, Department of Economics, vol. 31(1), pages 89-111, June.
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  33. repec:imf:imfwpa:07/207 is not listed on IDEAS
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