Inflation Targeting and Exchange Rate Rules in an Open Economy
IMF Working Papers, February 1, 2004
Source details
- Canonical URL
- Inflation Targeting and Exchange Rate Rules in an Open Economy
Other formats
Bibliographic details
- Authors: Eric Parrado
- Published: February 1, 2004
- Series: IMF Working Papers
- DOI: https://doi.org/10.5089/9781451921892.001
Model and scope
- Provides a simple dynamic neo-Keynesian model to analyze the impact of monetary policy that considers inflation targeting in a small open economy.
- Economy characteristics emphasized:
- imperfect competition
- short-run price rigidity
Main findings
- The effects of inflation targeting on output and inflation volatility depend crucially on:
- the exchange rate regime
- the inflation index being targeted
- Specific comparative results:
- In the presence of real shocks, flexible exchange rates dominate managed exchange rates.
- For nominal shocks, managed exchange rates dominate flexible exchange rates.
- Domestically generated inflation targeting is preferable to CPI inflation targeting because it is more stabilizing with respect to:
- both measures of inflation
- the output gap
- the real exchange rate
- Flexible inflation targeting outperforms strict inflation targeting in terms of welfare.
Policy implications and interpretation
- Choice of exchange rate regime should account for the relative importance of real versus nominal shocks.
- Selecting the inflation index for targeting matters: targeting a domestically generated inflation measure yields better stabilization outcomes than targeting CPI inflation.
- Greater flexibility in the inflation-targeting framework can improve welfare relative to stricter, less flexible rules.
Publication and metadata
- Author: Eric Parrado
- Publication type: IMF Working Papers
- Date: February 1, 2004
- Pages: 37
- Volume: 2004
- Issue: 021
- Series: Working Paper No. 2004/021
- DOI: https://doi.org/10.5089/9781451921892.001
- Stock No: WPIEA0212004
- ISBN: 9781451921892
- ISSN: 1018-5941
- Subjects: Exchange rate flexibility, Exchange rates, Foreign exchange, Inflation, Inflation targeting, Managed exchange rates, Monetary policy, Prices
- Keywords: commodity price inflation, CPI inflation targeting, exchange rate, Exchange rate flexibility, exchange rate rule, exchange rates, flexible CPI inflation targeting, Global, Inflation, inflation index, inflation indicator, inflation stability, inflation targeting, inflation targeting index, inflation volatility, interest rate shock, managed exchange rate case, Managed exchange rates, monetary policy, monetary policy rules, open economy, policy rule, Southeast Asia, WP
Eric Parrado. "Inflation Targeting and Exchange Rate Rules in an Open Economy", IMF Working Papers 2004, 021 (2004), accessed 9/17/2026, https://doi.org/10.5089/9781451921892.001