Explicit and Implicit Targets in Open Economies

Silvia Sgherri

No 2005/176, IMF Working Papers from International Monetary Fund

Abstract: Under a flexible inflation targeting regime, should policymakers avoid any reaction to movements in the foreign exchange market? Using data for six advanced open economies explicitly targeting inflation, the paper examines empirically whether real exchange rate disequilibria systematically affect the conduct of monetary policy. Estimates indicate that monetary policy responses in inflation-targeting, open economies have changed significantly, as the institutional framework for the conduct of monetary policy has evolved. In particular, an explicit target for core inflation and a greater use of the expectation channel of monetary policy appear to be key features of the newest policy framework. In this context, central banks are unlikely to react to regular fluctuations in the exchange rate.

Keywords: WP; mover accent; output gap; Inflation targeting; interest rate rules; exchange rates; monetary policy; interest rate rule; reaction function; interest rate movement; interest rate response; inflation-targeting open economies; responses to deviation; exchange rate misalignment; output gap forecast; interest rate reaction function; interest rate change; exchange rate response; monetary policy response; Real exchange rates; Consumer price indexes; Inflation; Australia and New Zealand (search for similar items in EconPapers)
Pages: 27
Date: 2005-09-01
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Citations: View citations in EconPapers (5)

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Journal Article: Explicit and implicit targets in open economies (2008)
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