Hybrid Inflation Targeting Regimes

By Carlos Garcia, Jorge Restrepo, Scott Roger

October 1, 2009

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Format: Chicago

Carlos Garcia, Jorge Restrepo, and Scott Roger. Hybrid Inflation Targeting Regimes, (USA: International Monetary Fund, 2009) accessed December 22, 2024

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.

Subject: Exchange rates, Inflation, Inflation targeting, Real exchange rates, Return on investment

Keywords: Emerging market, Mover accent, Open economy, WP

Publication Details

Pages:

57
Volume:

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DOI:

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Issue:

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Series:

Working Paper No. 2009/234
Stock No:

WPIEA2009234
ISBN:

9781451873818
ISSN:

1018-5941

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