Should inflation-targeting central banks respond to exchange rate movements?

Robert Pavasuthipaisit

Journal of International Money and Finance, 2010, vol. 29, issue 3, 460-485

Abstract: This paper examines whether it is optimal for inflation-targeting central banks to respond to exchange-rate movements. The paper finds that exchange-rate movements can provide a signal on the developments in the economy that the central bank cannot perfectly observe. The results suggest that when the degrees of exchange-rate pass-through and international financial integration are high, it is optimal for the central bank to pay more attentions to exchange-rate movements. These results however depend on two conditions: 1) the ability of the central bank to observe the true exchange-rate process and 2) the number of real frictions in the model economy.

Keywords: Inflation; targeting; Optimal; policy; under; commitment; Exchange-rate; pass-through; Open-economy; DSGE; Imperfect; information; Kalman; filter (search for similar items in EconPapers)
Date: 2010
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Citations: View citations in EconPapers (23)

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Persistent link: https://EconPapers.repec.org/RePEc:eee:jimfin:v:29:y:2010:i:3:p:460-485

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