Balance of Payments Crises Under Inflation Targeting

Author/Editor:

Shujing Li ; Isabel K. Yan ; Michael Kumhof

Publication Date:

April 1, 2007

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

This paper analyzes a small open economy model under inflation targeting. It shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously. The speed at which the regime collapses, and the extent of reserve losses, are increasing in the central bank's explicit or implicit commitment to intervene in the foreign exchange market. Attacks are therefore ranked, from most to least severe, as follows: Exchange rate targeting, CPI inflation targeting, domestic nontradables inflation targeting, and money targeting. Under inflation targeting the size of the attack is increasing in the tradables consumption share.

Series:

Working Paper No. 07/84

Subject:

English

Publication Date:

April 1, 2007

ISBN/ISSN:

9781451866483/1018-5941

Stock No:

WPIEA2007084

Format:

Paper

Pages:

26

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