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Hybrid Inflation Targeting Regimes
Author:
Carlos Garcia null

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Jorge Restrepo null

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Mr. Scott Roger
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Series:
IMF Working Papers
Volume/Issue:
Volume 2009: Issue 234
Language:
English
Publication Date:
01 Oct 2009
DOI:
https://doi.org/10.5089/9781451873818.001
ISBN:
9781451873818
ISSN:
1018-5941
Pages:
57
Keywords:
WP; mover accent; open economy; emerging market
Legal-disclaimer:
IMF Working Papers describe research in progress by the author(s) and are published to elicit comments and to encourage debate. The views expressed in IMF Working Papers are those of the author(s) and do not necessarily represent the views of the IMF, its Executive Board, or IMF management.
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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.
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Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund