Inflation Targeting in a Small Open Economy

Alan Sutherland ()

No 2726, CEPR Discussion Papers from C.E.P.R. Discussion Papers

Abstract: A small open economy model is presented, which allows explicit treatment of uncertainty and its effects on macroeconomic behaviour. Inflation targeting is compared to the welfare maximizing monetary rule and to a fixed nominal exchange rate. It is found that flexible inflation targeting produces too little exchange rate volatility compared to the optimal rule but delivers higher welfare than a fixed nominal exchange rate. Strict inflation targeting also delivers higher welfare than a fixed rate. In addition it is found that the welfare-maximizing monetary rule can be replicated if the central bank?s objective function includes the nominal exchange rate.

Keywords: Monetary policy; Inflation targeting; Open economy (search for similar items in EconPapers)
JEL-codes: E52 E58 F41 (search for similar items in EconPapers)
Date: 2001-03
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Citations: View citations in EconPapers (17)

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