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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://128.118.178.162/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://128.118.178.162

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  1. Maurice Obstfeld and Kenneth Rogoff., 1999. "New Directions for Stochastic Open Economy Models," Center for International and Development Economics Research (CIDER) Working Papers C99-107, University of California at Berkeley.
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  13. Taylor, John B., 2000. "Low inflation, pass-through, and the pricing power of firms," European Economic Review, Elsevier, vol. 44(7), pages 1389-1408, June.
  14. Gilles Oudiz & Jeffrey Sachs, 1985. "International Policy Coordination in Dynamic Macroeconomic Models," NBER Chapters, in: International Economic Policy Coordination, pages 274-330 National Bureau of Economic Research, Inc.
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