Inflation targeting and exchange rate volatility smoothing: A two-target, two-instrument approach
Carlos Castillo-Maldonado
Economic Modelling, 2014, vol. 43, issue C, 330-345
Abstract:
This paper introduces a strategy to model a small open economy, whose central bank has established two simultaneous policy objectives: an inflation target, and a maximum limit for nominal exchange rate volatility. In line with the Tinbergen–Aoki condition, the monetary authority establishes two policy instruments, one for accomplishing each target: the monetary policy rate, and the stock of foreign exchange reserves. Monetary policy analysis is built around a non-microfounded augmented New Keynesian DSGE model estimated through Bayesian techniques for the Guatemalan economy. It is found that each instrument is efficient in accomplishing its own target. Nevertheless, a coordinated effort is required for central bank policymakers before employing both instruments simultaneously, in order to avoid sending mixed signals to economic agents about its monetary policy stance, and endanger the achievement of its inflation target.
Keywords: Bayesian estimation; Inflation targeting; Guatemala (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (5)
Downloads: (external link)
http://www.sciencedirect.com/science/article/pii/S0264999314003216
Full text for ScienceDirect subscribers only
Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.
Export reference: BibTeX
RIS (EndNote, ProCite, RefMan)
HTML/Text
Persistent link: https://EconPapers.repec.org/RePEc:eee:ecmode:v:43:y:2014:i:c:p:330-345
DOI: 10.1016/j.econmod.2014.08.011
Access Statistics for this article
Economic Modelling is currently edited by S. Hall and P. Pauly
More articles in Economic Modelling from Elsevier
Bibliographic data for series maintained by Catherine Liu ().