Monetary policy and exchange rate targeting in open economies
We develop an institutional framework for central banks that try to pursue a stability-oriented monetary policy in open-economies by directly targeting the exchange rate. Our main intention is to design a framework which avoids excessive capital inflows that can be regarded as a main cause of the crises in Asia, Latin America, Eastern and Central Europe and of the ERM I. In an open economy policy makers can target two interrelated variables: the interest rate and the exchange rate. These two operating target have to fulfil two different conditions. On the one hand they have to create monetary conditions that are consistent with the domestic economic situation. On the other hand they have to be compatible with a risk-premium adjusted uncovered interest parity condition (UIP). It is obvious that both conditions are difficult to met. In our view sustained violations of the second condition provide an important explanation for the problem of speculative capital inflows under a fixed nominal peg. We show that an adjustable nominal peg is in most cases a better solution to the dual requirement of UIP and adequate monetary conditions. This leads to a new solution for the inconsistency triangle: a central bank can combine an autonomous domestic interest rate policy with capital mobility and a floor for the target path of the exchange rate.
|Date of creation:||2000|
|Date of revision:|
|Contact details of provider:|| Postal: Sanderring 2, D-97070 Würzburg|
Phone: (0931) 31-2901
Fax: (0931) 31-2101
Web page: http://www.vwl.uni-wuerzburg.de/en/no_cache/lehrstuehle/vwl1/home/
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Reinhart, Carmen & Kaminsky, Graciela & Lizondo, Saul, 1998.
"Leading Indicators of Currency Crises,"
6981, University Library of Munich, Germany.
- Sveinbjörn Blöndal & Hans Christiansen, 1999. "The Recent Experience with Capital Flows to Emerging Market Economies," OECD Economics Department Working Papers 211, OECD Publishing.
- Bernanke, Ben & Gertler, Mark, 1995.
"Inside the Black Box: The Credit Channel of Monetary Policy Transmission,"
95-15, C.V. Starr Center for Applied Economics, New York University.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," Journal of Economic Perspectives, American Economic Association, vol. 9(4), pages 27-48, Fall.
- Ben S. Bernanke & Mark Gertler, 1995. "Inside the Black Box: The Credit Channel of Monetary Policy Transmission," NBER Working Papers 5146, National Bureau of Economic Research, Inc.
- Takatoshi Ito, 1999.
"Capital Flows in Asia,"
NBER Working Papers
7134, National Bureau of Economic Research, Inc.
- Bofinger, Peter, 1996. "The economics of orthodox money-based stabilisations (OMBS): The recent experience of Kazakhstan, Russia and the Ukraine," European Economic Review, Elsevier, vol. 40(3-5), pages 663-671, April.
- Helmut Reisen, 1998. "Domestic Causes of Currency Crises: Policy Lessons for Crisis Avoidance," OECD Development Centre Working Papers 136, OECD Publishing.
- Kenneth A. Froot & Paul G.J. O'Connell & Mark S. Seasholes, 1998.
"The Portfolio Flows of International Investors, I,"
NBER Working Papers
6687, National Bureau of Economic Research, Inc.
- Steven Radelet & Jeffrey D. Sachs, 1998. "The East Asian Financial Crisis: Diagnosis, Remedies, Prospects," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 29(1), pages 1-90.
- repec:pal:imfstp:v:45:y:1998:i:1:p:1-48 is not listed on IDEAS
- Takatoshi Ito & Kathryn M. Dominguez & Moeen Qureshi & Zhang Shengman & Masaru Yoshitomi, 1999. "Capital Flows to East Asia," NBER Chapters, in: International Capital Flows, pages 111-190 National Bureau of Economic Research, Inc.
When requesting a correction, please mention this item's handle: RePEc:zbw:wuewep:14. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (ZBW - German National Library of Economics)
If references are entirely missing, you can add them using this form.