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Alternative Targeting Regimes, Transmission lags and the Exchange rate Channel

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  • Jean-Paul Lam

    (Bank of Canada)

Abstract

Using a closed-economy model, Jensen (2002) and Walsh (2003), have, respectively shown that a policy regime that optimally targets nominal income growth (NIT) or the change in the output gap (SLT) outperforms a regime that targets inflation, because NIT and SLT induce more inertia in the actions of the central bank, effectively replicating the outcome obtained under precommitment. We obtain a very different result when the analysis is extended to open-economy models. Flexible CPI-inflation targeting outperforms both SLT and NIT and is the most robust targeting regime. The gains from targeting CPI inflation are particularly large when the model features transmission lags and/or departures from the uncovered interest parity condition. We also find that the stabilization bias inherent in discretionary policy is smaller in an open-economy setting.

Suggested Citation

  • Jean-Paul Lam, 2003. "Alternative Targeting Regimes, Transmission lags and the Exchange rate Channel," Macroeconomics 0309005, University Library of Munich, Germany, revised 03 Dec 2003.
  • Handle: RePEc:wpa:wuwpma:0309005
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    Cited by:

    1. Jean-Paul Lam & Florian Pelgrin, 2004. "The Implications of Transmission and Information Lags for the Stabilization Bias and Optimal Delegation," Staff Working Papers 04-37, Bank of Canada.
    2. Sra Chuenchoksan & Don Nakornthab & Surach Tanboon, 2008. "Uncertainty in the Estimation of Potential Output and Implications for the Conduct of Monetary Policy," Working Papers 2008-04, Monetary Policy Group, Bank of Thailand.
    3. David Longworth, 2003. "Implications of a changing economic structure for the strategy of monetary policy : commentary," Proceedings - Economic Policy Symposium - Jackson Hole, Federal Reserve Bank of Kansas City, pages 349-360.
    4. Denise Côté & John Kuszczak & Jean-Paul Lam & Ying Liu & Pierre St-Amant, 2004. "The performance and robustness of simple monetary policy rules in models of the Canadian economy," Canadian Journal of Economics, Canadian Economics Association, vol. 37(4), pages 978-998, November.
    5. Andrzej Raczko, 2017. "Elements of unconventional monetary policy at the European Central Bank (Elementy niekonwencjonalnej polityki pienieznej Europejskiego Banku Centralnego)," Research Reports, University of Warsaw, Faculty of Management, vol. 2(25), pages 74-83.
    6. Thorvardur Tjörvi Ólafsson, 2006. "The New Keynesian Phillips Curve: In Search of Improvements and Adaptation to the Open Economy," Economics wp31_tjorvi, Department of Economics, Central bank of Iceland.
    7. Ali, Syed Zahid & Anwar, Sajid, 2011. "Supply-side effects of exchange rates, exchange rate expectations and induced currency depreciation," Economic Modelling, Elsevier, vol. 28(4), pages 1650-1672, July.

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    More about this item

    Keywords

    discretion; commitment; exchange rate expectations; targeting regimes; transmission lags.;
    All these keywords.

    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

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