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CPI Inflation Targeting and Exchange Rate Pass-through

  • Alessandro Flamini

    (GIIS)

This paper analyzes how imperfect exchange rate pass-through affects the transmission of the CPI inflation targeting optimal monetary policy. In the short run, delayed pass-through constraints monetary policy more than incomplete pass-through and interest rate smoothing amplifies this effect. In addition, imperfect pass-through does not increase the variability of the real exchange rate for a subset of strict CPI inflation targeting cases and for flexible CPI inflation targeting. Furthermore, there exists an inverse relation between the pass-through and the insulation of CPI inflation from foreign shocks, and when the pass-through falls, the impact on the trade-off between the stabilization of both CPI inflation and output depends on how strictly the central bank is targeting CPI inflation and on the kind of imperfect pass-through.

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File URL: http://econwpa.repec.org/eps/mac/papers/0306/0306017.pdf
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Paper provided by EconWPA in its series Macroeconomics with number 0306017.

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Length: 37 pages
Date of creation: 26 Jun 2003
Date of revision:
Handle: RePEc:wpa:wuwpma:0306017
Note: Type of Document - Acrobat PDF; prepared on IBM PC ; to print on HP; pages: 37 ; figures: included
Contact details of provider: Web page: http://econwpa.repec.org

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  1. Richard Clarida & Jordi Gali & Mark Gertler, 2002. "A Simple Framework for International Monetary Policy Analysis," NBER Working Papers 8870, National Bureau of Economic Research, Inc.
  2. Betts, Caroline & Devereux, Michael B., 2000. "Exchange rate dynamics in a model of pricing-to-market," Journal of International Economics, Elsevier, vol. 50(1), pages 215-244, February.
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  16. Paul Krugman, 1986. "Pricing to Market when the Exchange Rate Changes," NBER Working Papers 1926, National Bureau of Economic Research, Inc.
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  19. 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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