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Open-Economy Inflation Targeting

  • Svensson, Lars E O

The paper examines inflation targeting in a small open economy with forward-looking aggregate supply and demand with microfoundations, and with stylised realistic lags in the different monetary-policy transmission channels. The paper compares strict and flexible targeting of CPI and domestic inflation and inflation-targeting reaction functions and the Taylor rule. Flexible CPI-inflation targeting does not only limit the variability of CPI inflation but also the variability of the output gap and the real exchange rate. Negative productivity supply shocks and positive demand shocks have similar effects on inflation and the output gap and induce similar monetary policy responses.

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Paper provided by C.E.P.R. Discussion Papers in its series CEPR Discussion Papers with number 1989.

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Date of creation: Oct 1998
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Handle: RePEc:cpr:ceprdp:1989
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  1. Ray C. Fair & E. Philip Howrey, 1995. "Evaluating Alternative Monetary Policy Rules," Cowles Foundation Discussion Papers 1091, Cowles Foundation for Research in Economics, Yale University.
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  20. Francisco Nadal De Simone, 1997. "Current account and exchange rate behaviour under inflation targeting in a small open economy," Reserve Bank of New Zealand Discussion Paper Series G97/4, Reserve Bank of New Zealand.
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  25. Rogoff, Kenneth, 1985. "The Optimal Degree of Commitment to an Intermediate Monetary Target," The Quarterly Journal of Economics, MIT Press, vol. 100(4), pages 1169-89, November.
  26. John C. Williams, 1999. "Simple rules for monetary policy," Finance and Economics Discussion Series 1999-12, Board of Governors of the Federal Reserve System (U.S.).
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  28. Stephen G. Cecchetti, 1998. "Policy rules and targets: framing the central banker's problem," Economic Policy Review, Federal Reserve Bank of New York, issue Jun, pages 1-14.
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  31. Stanley Fischer, 1996. "Why are central banks pursuing long-run price stability?," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 7-34.
  32. William Kerr & Robert G. King, 1996. "Limits on interest rate rules in the IS model," Economic Quarterly, Federal Reserve Bank of Richmond, issue Spr, pages 47-75.
  33. Michael Woodford, 1994. "Nonstandard Indicators for Monetary Policy: Can Their Usefulness Be Judged from Forecasting Regressions?," NBER Chapters, in: Monetary Policy, pages 95-115 National Bureau of Economic Research, Inc.
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  37. Blake, Andrew P & Westaway, Peter F, 1996. "Credibility and the Effectiveness of Inflation Targeting Regimes," The Manchester School of Economic & Social Studies, University of Manchester, vol. 64(0), pages 28-50, Suppl..
  38. P.A. Tinsley, 1993. "Fitting both data and theories: polynomial adjustment costs and error- correction decision rules," Finance and Economics Discussion Series 93-21, Board of Governors of the Federal Reserve System (U.S.).
  39. Fuhrer, Jeffrey C & Moore, George R, 1995. "Monetary Policy Trade-offs and the Correlation between Nominal Interest Rates and Real Output," American Economic Review, American Economic Association, vol. 85(1), pages 219-39, March.
  40. Backus, David & Driffill, John, 1986. "The Consistency of Optimal Policy in Stochastic Rational Expectations Models," CEPR Discussion Papers 124, C.E.P.R. Discussion Papers.
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  42. Julio Rotemberg & Michael Woodford, 1997. "An Optimization-Based Econometric Framework for the Evaluation of Monetary Policy," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 297-361 National Bureau of Economic Research, Inc.
  43. Glenn Rudebusch, 1996. "Is opportunistic monetary policy credible?," FRBSF Economic Letter, Federal Reserve Bank of San Francisco, issue oct4.
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