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Alternative monetary-policy instruments and limited credibility: an exploration

Javier Garcia-Cicco
Authors registered in the RePEc Author Service: Javier Garcia Cicco

No 1020, BIS Working Papers from Bank for International Settlements

Abstract: We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; 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. 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 rules: 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, highlighting specially the role of exchange-rate volatility in shaping medium- and long-term inflation forecasts, and its consequences for policy design.

Keywords: monetary policy rules; credibility; inflation expectations (search for similar items in EconPapers)
JEL-codes: E31 E52 (search for similar items in EconPapers)
Pages: 56 pages
Date: 2022-06
New Economics Papers: this item is included in nep-dge and nep-mon
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Related works:
Journal Article: Alternative monetary-policy instruments and limited credibility: An exploration (2022) Downloads
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2022) Downloads
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2022) Downloads
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2021) Downloads
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