Hybrid Inflation Targeting Regimes

Author/Editor:

Carlos Garcia ; Jorge Restrepo ; Scott Roger

Publication Date:

October 1, 2009

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 uses a DSGE model to examine whether including the exchange rate explicitly in the central bank's policy reaction function can improve macroeconomic performance. It is found that including an element of exchange rate smoothing in the policy reaction function is helpful both for financially robust advanced economies and for financially vulnerable emerging economies in handling risk premium shocks. As long as the weight placed on exchange rate smoothing is relatively small, the effects on inflation and output volatility in the event of demand and cost-push shocks are minimal. Financially vulnerable emerging economies are especially likely to benefit from some exhange rate smoothing because of the perverse impact of exchange rate movements on activity.

Series:

Working Paper No. 09/234

Subject:

English

Publication Date:

October 1, 2009

ISBN/ISSN:

9781451873818/1018-5941

Stock No:

WPIEA2009234

Price:

$18.00 (Academic Rate:$18.00)

Format:

Paper

Pages:

57

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