Cover IMF Working Papers
Inflation Targeting and Exchange Rate Management In Less Developed Countries
Author: Mr. Marco Airaudo, Mr. Edward F Buffie, and Luis-Felipe Zanna
Series:
IMF Working Papers
Volume/Issue:
Volume 2016: Issue 055
Language:
English
Publication Date:
08 Mar 2016
DOI:
https://doi.org/10.5089/9781513567433.001
ISBN:
9781513567433
ISSN:
1018-5941
Pages:
65
Keywords:
WP; inflation targeting; upper bound; core inflation; managed float; Exchange Rate; Indeterminacy; Taylor Principle; inflation rate; closed economy; exchange-rate-anchored IT; nominal interest rate; Exchange rates; Exchange rate flexibility; Currencies; Real exchange rates; Inflation; Sub-Saharan Africa; Africa; Central and Eastern Europe; Eastern Europe; East Asia
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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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 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 where macroeconomic fluctuations can be driven by self-fulfilling expectations. Moreover, small inflation shocks may escalate into much larger increases in inflation ex post. Both problems disappear when the central bank leans heavily against the wind in a managed float.
Cover IMF Working Papers
IMF Working Papers
ISSN:
1018-5941
Publisher:
International Monetary Fund