Balance of Payments Crises Under Inflation Targeting

Shujing Li, Isabel Yan and Michael Kumhof

No 2007/084, IMF Working Papers from International Monetary Fund

Abstract: This paper analyzes a small open economy model under inflation targeting. It shows why such a monetary regime is vulnerable to speculative attacks that take place over a short period rather than instantaneously. The speed at which the regime collapses, and the extent of reserve losses, are increasing in the central bank's explicit or implicit commitment to intervene in the foreign exchange market. Attacks are therefore ranked, from most to least severe, as follows: Exchange rate targeting, CPI inflation targeting, domestic nontradables inflation targeting, and money targeting. Under inflation targeting the size of the attack is increasing in the tradables consumption share.

Keywords: WP; rate of exchange (search for similar items in EconPapers)
Pages: 26
Date: 2007-04-01
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Citations: View citations in EconPapers (14)

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Related works:
Journal Article: Balance of payments crises under inflation targeting (2007)
Working Paper: Balance of Payments Crises Under Inflation Targeting
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Persistent link: https://EconPapers.repec.org/RePEc:imf:imfwpa:2007/084

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