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Open-Economy Inflation Targeting

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  • Svensson, Lars E O

Abstract

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.

Suggested Citation

  • Svensson, Lars E O, 1998. "Open-Economy Inflation Targeting," CEPR Discussion Papers 1989, C.E.P.R. Discussion Papers.
    • Handle: RePEc:cpr:ceprdp:1989
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    More about this item

    Keywords

    Price Stability; Transmission Mechanisms;

    JEL classification:

    • E52 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Monetary Policy
    • E58 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit - - - Central Banks and Their Policies
    • F41 - International Economics - - Macroeconomic Aspects of International Trade and Finance - - - Open Economy Macroeconomics

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