Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration

Javier García-Cicco ()
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Javier García-Cicco: Central Bank of Argentina
Authors registered in the RePEc Author Service: Javier Garcia Cicco

No 202191, BCRA Working Paper Series from Central Bank of Argentina, Economic Research Department

Abstract: We evaluate the dynamics of a small and open economy under alternative simple rules for different monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus is that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. In particular, we emphasize the exchange rate’s role in shaping medium- and long-term inflation forecasts. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy instruments: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, showing that the relative ranking is indeed influenced by how agents form inflation-related expectations.

Keywords: small open economy; monetary policy rules; macroeconomic models; inflation expectations (search for similar items in EconPapers)
JEL-codes: E17 E52 E58 (search for similar items in EconPapers)
Pages: 57 pages
Date: 2021-04
New Economics Papers: this item is included in nep-cba, nep-dge, nep-mac and nep-mon
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Related works:
Journal Article: Alternative monetary-policy instruments and limited credibility: An exploration (2022)
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2022)
Working Paper: Alternative monetary-policy instruments and limited credibility: an exploration (2022)
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2022)
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