Incorporating Financial Stability in Inflation Targeting Frameworks

Author/Editor:

Burcu Aydin ; Engin Volkan

Publication Date:

September 1, 2011

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:

The global financial crisis has exposed the limitations of a conventional inflation targeting (IT) framework in insulating an economy from shocks, and demonstrated that its rigid application may aggravate the effect of shocks on output and inflation. Accordingly, we investigate possible refinements to the IT framework by incorporating financial stability considerations. We propose a small open economy DSGE model, calibrated for Korea during the period of 2003 - 07, with real and financial frictions. The findings indicate that incorporating financial stability considerations can help smooth business cycle fluctuations more effectively than a conventional IT framework.

Series:

Working Paper No. 11/224

Subject:

English

Publication Date:

September 1, 2011

ISBN/ISSN:

9781463904326/1018-5941

Stock No:

WPIEA2011224

Format:

Paper

Pages:

45

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