Article ID | Journal | Published Year | Pages | File Type |
---|---|---|---|---|
7365367 | Journal of International Money and Finance | 2018 | 68 Pages |
Abstract
We analyze coordination of monetary and exchange rate policy in a two-sector model of a small open economy featuring imperfect substitution between domestic and foreign financial assets. Our central finding is that tight management of the exchange rate greatly enhances the efficacy of inflation targeting. In a flexible exchange rate system, inflation targeting incurs a high risk of indeterminacy. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank fixes the path of the nominal exchange rate or leans heavily against the wind in a managed float.
Related Topics
Social Sciences and Humanities
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Economics and Econometrics
Authors
Edward F. Buffie, M. Airaudo, Felipe Zanna,