Alternative monetary-policy instruments and limited credibility: An exploration

Javier García-Cicco
Authors registered in the RePEc Author Service: Javier Garcia Cicco

Latin American Journal of Central Banking (previously Monetaria), 2022, vol. 3, issue 1

Abstract: We evaluate the dynamics of a small and open economy under simple rules for alternative monetary-policy instruments, in a model with imperfectly anchored expectations. The inflation-targeting consensus indicates that interest-rate rules are preferred, instead of using either a monetary aggregate or the exchange rate as the main instrument; with arguments usually presented under rational expectations and full credibility. In contrast, we assume agents use econometric models to form inflation expectations, capturing limited credibility. We compare the dynamics after a shock to external-borrowing costs (arguably one of the most important sources of fluctuations in emerging countries) under three policy rules: a Taylor-type rule for the interest rate, a constant-growth-rate rule for monetary aggregates, and a fixed exchange rate. The analysis identifies relevant trade-offs in choosing among alternative instruments, highlighting specially the role of exchange-rate volatility in shaping medium- and long-term inflation forecasts, and its consequences for policy design.

Keywords: Monetary policy rules; Credibility; Expectations (search for similar items in EconPapers)
Date: 2022
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Related works:
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2022)
Working Paper: Alternative monetary-policy instruments and limited credibility: an exploration (2022)
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2022)
Working Paper: Alternative Monetary-Policy Instruments and Limited Credibility: An Exploration (2021)
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Persistent link: https://EconPapers.repec.org/RePEc:eee:lajcba:v:3:y:2022:i:1:s2666143822000060

DOI: 10.1016/j.latcb.2022.100051

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