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Alternative Targeting Regimes, Transmission lags and the Exchange rate Channel

  • Jean-Paul Lam

    (Bank of Canada)

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.

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Paper provided by EconWPA in its series Macroeconomics with number 0309005.

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Length: 26 pages
Date of creation: 04 Sep 2003
Date of revision: 04 Sep 2003
Handle: RePEc:wpa:wuwpma:0309005
Note: Type of Document - PDF; prepared on UNIX sunblade100; to print on HP/PostScript/Franciscan monk; pages: 26; figures: included
Contact details of provider: Web page: http://128.118.178.162

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