Abstract

The paper extends previous analysis of closed-economy inflation targeting to a small open economy with forward-looking aggregate supply and demand with some microfoundations, and with stylized realistic lags in the different transmission channels for monetary policy. The paper compares targeting of CPI and domestic inflation, strict and exible inflation targeting, and inflation-targeting reaction functions and the Taylor rule. The optimal monetary policy response to several different shocks is examined. Flexible CPI-inflation targeting stands out as successful in limiting not only the variability of CPI inflation but also the variability of the output gap and the real exchange rate. Somewhat counter to conventional wisdom, negative productivity supply shocks and positive demand shocks have similar effects on inflation and the output gap, and induce similar monetary policy responses. The model gives limited support for a so-called monetary conditions index, MCI, of the monetary-policy impact on aggregate d...

Citations

495	Discretion versus Policy Rules - Taylor - 1993
461	Staggered Prices in a Utility-Maximizing Framework - Calvo - 1983
348	An Optimization-based Econometric Framework for the Evaluation of Monetary Policy - Rotemberg, Woodford - 1997
292	Inflation Forecast Targeting: Implementing and Monitoring Inflation Targets - Svensson - 1997
159	Inflation Targeting as a Monetary Policy Rule - Svensson - 1999
133	Inflation Targeting: A New Framework for Monetary Policy - Bernanke, Mishkin - 1997
130	New Keynesian economics and the Phillips curve - Roberts - 1995
113	Inflation Forecasts and Monetary Policy - Bernanke, Woodford - 1997
107	Policy Rules for Open Economies,” in - Ball - 1999
100	Nominal income targeting in an open-economy optimizing model - McCallum, Nelson - 1999
88	Control of the public debt: A requirement for price stability - Woodford - 1996
76	Identifying monetary policy in a Small Open Economy under ‡exible exchange Rates - Cushman, Zha - 1997
53	Efficient Rules for Monetary Policy,” NBER Working Paper No - Ball - 1997
43	Why are central banks pursuing long-run price stability - Fischer - 1996
30	The optimal degree of commitment to an intermediate monetary target”, Quarterly - Rogo� - 1985
27	The Consistency of Optimal Policy - Backus, Driffill - 1986
27	Fitting Both Data and Theories: Polynomial Adjustment Costs and Error Correction Decision Rules - Tinsley
26	International Policy Coordination in Dynamic Macroeconomic Models,”in - Oudiz, Sachs - 1985
24	Inflation Targets in - McCallum - 1997
20	Policy rules for in‡ation targeting - Svensson - 1999
19	An optimizing IS-LM speci…cation for monetary policy and business cycle analysis - Nelson - 1999
17	What Operating Procedures Should Be Adopted to Maintain Price Stability?” in Federal Reserve Bank of Kansas City [40 - Freedman - 1996
17	Why exchange rate bands? monetary independence in spite of fixed exchange rates - Svensson - 1994
15	Monetary Policy Trade-o¤s and the Correlation Between Nominal Interest - Fuhrer, Moore - 1995
11	Credibility and Transparency: Monetary Policy with Unobservable Goals,” Working Paper - Faust, Svensson - 1998
11	Optimal In‡ation Targets - Svensson - 1997
8	Targeting In‡ation - Haldane, ed - 1995
8	How Should Central Banks Reduce In‡ation?—Conceptual Issues,” in Federal Reserve Bank of Kansas City [40 - King - 1996
8	Evaluating Policy Regimes and Analytic Models: Background and Project Summary - Bryant, Hooper, et al. - 1993
7	In‡ation targeting: some extensions. NBER working paper no - Svensson - 1997
6	Simple Rules for Monetary Policy,” Working paper, Board of Governors of the Federal Reserve System - Williams - 1997
4	Why Do the Monetary Authorities - Goodhart - 1996
4	Costly Adjustment Under Rational Expectations: A Generalization.” The Review of Economics and Statistics 73: 353–58 - Pesaran - 1991
4	Policy Rules and Targets: Framing the - Cecchetti - 1998
3	Controlling In‡ation with an Interest Rate - Judd, Motley - 1992
3	Is Opportunistic Monetary Policy Credible?,” Federal Reserve Bank of San Francisco Economic Letter - Rudebusch - 1996
3	Credibility and the E¤ectiveness of In‡ation Targeting Regimes,” Manchester School Supplement - Blake, Westaway - 1996
3	Monetary Theory and Policy, manuscript - Walsh - 1997
2	Howrey - Fair, Philip - 1996
2	The Lead of Output Over In‡ation - Kiley - 1996
2	A Framework for Analyzing Alternative Models of Nominal Rigidities,” Working Paper - -Nelson - 1997
2	The Opportunistic Approach to Disin‡ation,” Finance and Economcis - Orphanides, Wilcox - 1996
1	Current Account and Exchange Rate Behavior under In‡ation Targeting - Simone - 1997
1	Persistency in Sticky Price Models,” Working paper - Andersen - 1997