Exchange Rates, Policy Rules and Inflation

John David Pitchford and Neil J Vousden

Australian Economic Papers, 1987, vol. 26, issue 48, 43-57

Abstract: A variety of monetary policy rules have been suggested for use in the context of a floating exchange rate. This paper compares the effects of a constant money growth rate, "monetary targeting," "anti-inflation exchange-rate policy," and "leaning against the wind" in a small, open economy subject to foreign inflation. The effects of the various rules on the "stability" of the economy, their "inflation insulation" prop erties, and their capacity to result in a reduced inflation rate are derived and discussed. In the final section, these rules of thumb are related to an optimal rule. Copyright 1987 by Blackwell Publishers Ltd/University of Adelaide and Flinders University of South Australia

Date: 1987
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