Small Open Economies with Frictions in Credit Markets: Target inflation or money growth when floating?
I compare the relative merits of a policy of inflation targeting for small open economies with frictions in financial markets with an alternative floating regime that has a constant rate of domestic money growth. The differences between these two policies appear only in the dynamic properties of equilibria with credit rationing. When the probability of loan repayment is low, inflation targeting eliminates endogenous volatility when compared with a constant money growth, but equilibria remain indeterminate. When the probability of loan repayment is high, inflation targeting always improves on the stability of equilibria, and sometimes it also eliminates endogenous fluctuations.
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- Hernandez-Verme, Paula, 2002.
"Inflation, Growth and Exchange Rate Regimes in Small Open Economies,"
16699, University Library of Munich, Germany, revised Aug 2009.
- Paula Hernandez-Verme, 2004. "Inflation, growth and exchange rate regimes in small open economies," Economic Theory, Springer;Society for the Advancement of Economic Theory (SAET), vol. 24(4), pages 839-856, November.
- Bullard, James & Keating, John W., 1995. "The long-run relationship between inflation and output in postwar economies," Journal of Monetary Economics, Elsevier, vol. 36(3), pages 477-496, December.
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